Sunk Cost Fallacy (1 Viewer)

[swagswagyoloswag]

Hi,
Question:
James has a ticket for a football match in Sydney for which he paid $45. On the day of the game he takes the train to Sydney Olympic Park, which costs him $3. When he arrives, he realizes that the game is taking place in Moore Park instead. He can take a taxi for $50 and arrive just in time for the match. Otherwise, he will miss it. Suppose James values watching the match at $70. Should he take the taxi or go home?


My tutor told me he should, while I believe he shouldn't.


So basically James is at a point where he is at a $48 deficit. Continuing, he would've spent 98$ in total for a match at $70. Meaning he thinks "Since I've already spent that much, I should logically just spend extra 50 for the match", which to me doesn't sound like an economically smart decision.

Am I wrong?

What if the taxi was $1 and he valued the match at $2?

 

[Nailgun]

disclaimer: i dont do commerce or business lol

he has spent $48 already - the value of not watching a game is zero so the net value he's getting out of this is $-48
whereas if he spends the extra cash on the taxi he has the added value of watching the game, $70 - $98 and therefore his net value is $-28
neither breaks even, but one has a higher net value

just my 2c (see what i did there)

 

[Chronost]

disclaimer: i dont do commerce or business lol

he has spent $48 already - the value of not watching a game is zero so the net value he's getting out of this is $-48
whereas if he spends the extra cash on the taxi he has the added value of watching the game, $70 - $98 and therefore his net value is $-28
neither breaks even, but one has a higher net value

just my 2c (see what i did there)

Dis is correct ^

Basically he if doesnt go to the match its - 48 because thats what he spent, not -48+50 because hes not gaining any cash

thus its -48-50 = -98

and he gets 70 back as his game value, thus total is -28, which is better then -48


Ye

 

[Nailgun]

then by the same logic, it would still be better to go to the game even if it was worth $2 and the taxi was $1

 

[swagswagyoloswag]

Ok. Thanks. was confused because of my tutor's reason (mentioned in the OP).
Also after reading this added to the confusion: https://www.logicallyfallacious.com/tools/lp/Bo/LogicalFallacies/173/Sunk_Cost_Fallacy

 

[obliviousninja]

Im probably wrong but i thought we just disregard the 48. As its nonrecoverable.

So at this point he is spending 50 to get 70 value.

End outcome is the same as you guys previously mentioned

 

[Nailgun]

Ok. Thanks. was confused because of my tutor's reason (mentioned in the OP).
Also after reading this added to the confusion: https://www.logicallyfallacious.com/tools/lp/Bo/LogicalFallacies/173/Sunk_Cost_Fallacy

I think the sunk cost fallacy is more like

I paid $20 for a non-refundable movie ticket

Then I realise the movie sucks, and I would hate watching it, the the time wasted/lack of enjoyment could be quantified as a value of $-5

So I think to myself, I don't want to go, but if I don't go even after I've bought a ticket then it's a waste of $20
However this is irrational - the $20 is already gone and isn't coming back. It is a sunk cost.
Therefore you must consider the situation irrespective of the original money.
If you go to the movie, the net value of the day is $-5 due to the waste of time and boredom lel. If you stay at home, the net value is $0. 0 > -5, hence it is logical to stay at home.

 

[Nailgun]

Im probably wrong but i thought we just disregard the 48. As its nonrecoverable.

So at this point he is spending 50 to get 70 value.

End outcome is the same as you guys previously mentioned

Disregarding it is the same as subtracting it from both sides I think, so it is essentially the same thing?

 

[seremify007]

There's a lot of back and forth but isn't the ultimate point that when faced with a 'new' decision, you only look at incremental in/outflows and disregard what you may already have spent?

 

[seremify007]

Disregarding it is the same as subtracting it from both sides I think, so it is essentially the same thing?

In this example yes, but I think what would have been more correct would be whether or not there was an opportunity for partial or full refund/credit/exchange kindof thing by not attending.

 

[jinxyy]

Obliviousninja and seremify is right. Chronost and nailgun have the wrong answers. Sunk costs are costs that you have already spent and are thus unavoidable. Therefore you disregard sunk costs when calculating or doing valuations for investments. In this case, the $48 has already been spent and is unrecoverable so we disregard the amount. He values the game at $70 and he has to pay $50 to see it, therefore he is benefiting by $20.

 

[obliviousninja]

Obliviousninja and seremify is right. Chronost and nailgun have the wrong answers. Sunk costs are costs that you have already spent and are thus unavoidable. Therefore you disregard sunk costs when calculating or doing valuations for investments. In this case, the $48 has already been spent and is unrecoverable so we disregard the amount. He values the game at $70 and he has to pay $50 to see it, therefore he is benefiting by $20.

lols yay micro OP

 

[Trebla]

Hi,
Question:
James has a ticket for a football match in Sydney for which he paid $45. On the day of the game he takes the train to Sydney Olympic Park, which costs him $3. When he arrives, he realizes that the game is taking place in Moore Park instead. He can take a taxi for $50 and arrive just in time for the match. Otherwise, he will miss it. Suppose James values watching the match at $70. Should he take the taxi or go home?


My tutor told me he should, while I believe he shouldn't.


So basically James is at a point where he is at a $48 deficit. Continuing, he would've spent 98$ in total for a match at $70. Meaning he thinks "Since I've already spent that much, I should logically just spend extra 50 for the match", which to me doesn't sound like an economically smart decision.

Am I wrong?

What if the taxi was $1 and he valued the match at $2?

A flaw in your argument is that it does not consider the opportunity cost of not watching the match (i.e. the absence of a $70 benefit vs. having a $70 benefit).

Here is one way to think of it.

Costs spent so far are:
- $45 on ticket
- $3 on train to Olympic Park

Decision 1: Take the taxi and watch the game
- $50 cost on taxi
- $70 benefit in watching the game

Decision 2: Go home
- $3 cost (presumably) in going back home
- $0 benefit from not watching the game

For Decision 1 the total cost/benefit/utility is: $-45 + $-3 + $-50 + $70 = $-28

For Decision 2 the total cost/benefit/utility is: $-45 + $-3 + $-3 + $0 = $-51

Based on the principle of maximising utility (i.e. we choose the option with the largest utility), we choose to go to the game (Decision 1). Notice how in both cases, we counted the cost of the ticket and train already sunk. However, counting in the sunk costs should make no difference to the decision we ultimately make (as we are making comparisons on a relative basis i.e. the numerical output of the decisions themselves is irrelevant but the relative ranking between decisions is important) hence the whole idea of just ignoring sunk costs when making these decisions.

If we ignore the sunk costs (as doing so still preserves the ranking of the utility), the comparison is now between $20 and $-3 in which case we still go for Decision 1.

 

[Chronost]

Obliviousninja and seremify is right. Chronost and nailgun have the wrong answers. Sunk costs are costs that you have already spent and are thus unavoidable. Therefore you disregard sunk costs when calculating or doing valuations for investments. In this case, the $48 has already been spent and is unrecoverable so we disregard the amount. He values the game at $70 and he has to pay $50 to see it, therefore he is benefiting by $20.

You're totally right, i just revised this from another subject, I must've got the wrong screw on at the time , apologies.

 

[Nailgun]

You're totally right, i just revised this from another subject, I must've got the wrong nail on at the time , apologies.

ftfy