Free Misbehaving: The Making of Behavioral Economics by Richard H. Thaler Page A

In their recent book Scarcity , Sendhil Mullainathan and Eldar Shafir (2013) report that, on this dimension, the poor come closer to behaving like Econs than those who are better off, simply because opportunity costs are highly salient for them. If a $100 windfall could pay the overdue utility bill or replace the kids’ shoes that are now too small, opportunity costs are front and center. However, this incessant fretting about opportunity costs takes a toll. Having to constantly worry about where the money is going to come from to pay the rent makes it hard to keep up with everything, and may contribute to some of the bad decisions made by the poor, such as taking out and rolling over payday loans.
    †    The median is the statistical term for middle. If all the prices are ranked from high to low, the median answer is the one with as many answers higher as lower.
    ‡    A recent study finds that when U.S. supermarkets were confronted with the challenge of a Walmart entering their home market, all suffered, but those who used a promotional pricing strategy (e.g., frequent sales) experienced significantly greater revenues and long-term viability than an everyday low price strategy (Ellickson, Misra, and Nair, 2012).

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    Sunk Costs
    Vince paid $1,000 to an indoor tennis club that entitled him to play once a week for the indoor season. After two months he developed tennis elbow, which made playing painful. He continued to play in pain for three more months because he did not want to waste the membership fee. He only stopped playing when the pain became unbearable.
    W hen an amount of money has been spent and the money cannot be retrieved, the money is said to be sunk, meaning gone. Expressions such as “don’t cry over spilt milk” and “let bygones be bygones” are another way of putting economists’ advice to ignore sunk costs. But this is hard advice to follow, as the example from the List about driving to a basketball game in a blizzard, and the story of Vince and his tennis elbow, illustrate.
    To make things clear, let’s stipulate that if a friend invited Vince to play tennis (for free) at another club, Vince would say no because of his painful elbow. In economics lingo that means the utility of playing tennis is negative. But having paid $1,000 he continues to play, seemingly making himself worse off every time he does so. Why would he do such a thing? That is the question I wanted to answer.
    Over the years I collected dozens of examples of people paying attention to sunk costs. One involved a friend, Joyce, who was fighting with her six-year-old daughter Cindy about what she should wear to school. Cindy had decided that she no longer wanted to wear dresses, only pants or shorts. Joyce insisted that Cindy had to wear three dresses that had been purchased in preparation for the beginning of first grade. Shouts of “I bought those dresses, and you are going to wear them!” began many days, with Cindy replying that she would not go to school if she had to wear a dress. I am guessing that Joyce probably asked, unhelpfully, whether Cindy thought that money grows on trees.
    I was brought in as a mediator, and explained the economic logic to Joyce. The money paid for the dresses was gone, and wearing the dresses would not get it back. As long as sticking to pants and shorts would not require any new clothing purchases, then insisting that Cindy wear the dresses would not help their financial situation. Joyce was thrilled to hear this news. She hated fighting with her daughter, but genuinely felt guilty about “wasting” the purchase of those three dresses. Having an economist tell her that ignoring sunk costs is perfectly rational, even required, was all she needed. Maya Bar-Hillel started calling me the world’s only clinical economist. (After her quilt purchase she became my first client.)
    I may or may not have deserved that title, but I was hardly the only economist to recognize that Humans have trouble