Meal Credits, Sports Tickets, and the Sunk Cost Fallacy

Imagine the scene: It is 1:30 a.m., and the university dining options close in half an hour. You still have a meal credit remaining for the day, and it will expire at 2 a.m. if left unused. You aren’t that hungry, and it’s drizzling a bit out, but you have already spent the money on the meal credit. There are no refunds. Do you go out to spend your credit?

Or consider this scenario that applies to non-college students (as described in an article by Hal Arkes and Catherine Blumer, then of Ohio University): You have paid for a non-refundable ticket to a football game. Just before you leave your house, however, a blizzard begins. The roads are sure to be icy and dangerous, and you know that the commute to and from the game will be far more painful than any pleasure from the game itself. Still, you don’t want to waste your money. Would you drive to the game?

Many people would indeed go spend their meal credit or drive to the game despite the snow because of a problem known as the sunk cost fallacy. The sunk cost fallacy explains why people sometimes take actions contrary to their interests because they over-account for costs they have already spent.

In short, the student dwells on the money they already spent on the meal credit, despite its being unrecoverable, and decides that the only way to redeem the value is to use the credit. Using the credit, however, is net bad for the student because the additional costs of the decision (eating when not hungry; venturing out in the rain) exceed the additional benefits. Similarly, the sporting fan focuses on trying to redeem value for the ticket they purchased, despite the additional costs of attending the game outstripping the additional benefits.

Even when one knows the irrelevance of sunk costs, it can be difficult to wholly ignore them. For example, I recently misplaced my electronic meal card at a summer camp and was asked to pay $15 to replace it. Although I understood that my other card had been lost and was thus un-refundable, I was upset that I had to spend an additional $15 on food, the costs of which had already been factored into my salary. In fact, I was almost more upset about the lost value of the old card than I was about having to pay the replacement value for a new one, and I was tempted to not buy a new card.

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How did I end up resolving my dilemma? It was not until I discounted having already bought a card that the decision became clear.

The question I needed to ask myself was, at that moment without a meal card, was it worth it spend $15 to get access to the food? Because the costs of finding my own food, in addition to the time to walk into town, were far greater than $15, I decided that buying a new card was worth it, despite the prior costs. (And when I eventually found my old card and got a refund, I was even happier with my decision.)

I recommend using a similar approach when deciding what career options to pursue; how to spend your free time; which relationships to maintain; and lots of other choices in which people invest time and money and thus feel compelled to follow through on their decisions.

Here’s a relevant example given recent analysis of the legal market:

If you’re a year and a half into a law degree, but you’ve decided that you hate law and will not be pursuing it professionally, nor will it boost your earnings in the field you do choose, you should not feel forced to finish the degree. Finishing the program would likely cost upwards of $60,000, in addition to foregone opportunities, but there is little marginal (additional) benefit because you are sure you will not use the degree. People in this situation would likely feel committed to getting a JD so as to not waste their first year and a half, but continuing with the program only wastes another year and a half.

To be clear, sometimes costs in the past are relevant. For example, politicians might need to stick with inadvisable decisions so as to avoid ‘flip-flopping’ or admitting weakness. For most young people, however, it is a poor decision to continue throwing good money after bad, and they could come out ahead by separating unrecoverable costs from the marginal benefits moving forward.