The relevance of sunk costs


A mother has signed up her child for summer camp, and paid a $500 nonrefundable fee.

Then the child asserts, "I don't want to go to the camp after all."

The parent responds, "No way: I paid for the camp ready, and you're going!"

The kid comes back with, "But mom, that is a sunk cost. It is irrelevant."

Is the kid right, and parents have been wrong all these years when invoking the "I paid for it already" principle?

No, in this case, paying attention to the "sunk costs" is a method of checking future, potentially frivolous, signing up for things. If the child knows that he is going to have to attend any activity that has been paid for, he will think carefully about what to sign up for.

4 comments:

  1. Generally speaking, someone who appeals to sunk costs is invoking a useful heuristic that covers a number of good reasons to follow through, only some of which may be fallacious. Reasons a sunk cost would coincide with continuation being smart:

    - It's less costly to do it now that to do it later when you'd have to pay the sunk cost again.

    - Like you mentioned, it's a defense against being caught in an intransitive failure mode in which you keep reverting on your preferences.

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    1. Very good analysis, Silas.

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  2. I don't see this as a violation of the injunction to ignore sunk costs. If the child is forced to follow through, this is done, as you imagine, for the forward-looking reason that future costs will be lower - the fact that it has already been paid for has no bearing on the decision.

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    1. Yes, Kevin, I can certainly see looking at it that way. But what happens when you keep doing this is that what we get is an a priori truth that one CAN'T worry about sunk costs, and not an admonition that one shouldn't worry about them.

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