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

with this concept. In fact, the mistake is so common it has an official name—the sunk cost fallacy —and the fallacy is often mentioned in basic economics textbooks. But many people, even if they understand the concept in principle, can find it difficult to follow the advice to ignore sunk costs in practice.
    Driving to the game in the blizzard, or playing tennis in pain, are mistakes no Econ would make. They rightly treat sunk costs as irrelevant. But for Humans, sunk costs linger and become another SIF, and not only for things like dinners and concerts. Many people believe that the United States continued its futile war in Vietnam because we had invested too much to quit. Barry Staw, a professor of organizational behavior, wrote a paper on what he called “escalation of commitment” and called the paper “Knee-Deep in the Big Muddy,” after an antiwar song by the folk singer Pete Seeger. * Every thousand lives lost and every billion dollars spent made it more difficult to declare defeat and move on, in Staw’s view. Some supposedly irrelevant factors can matter quite a lot.
    Why do sunk costs matter? And why might people think that continuing a course of action—going to the game or concert, or continuing a futile war—is worth it? As we saw in the previous chapter, when you make a purchase at a price that does not produce any transaction utility (or disutility), you do not feel the purchase price as a loss. You have paid some money, and when you consume the product you will get the pleasure of the acquisition utility and the account will clear; your earlier cost is canceled out by your later gain. But what happens when you buy the ticket and then skip the event?
    Paying $100 for a ticket to a concert that you do not attend feels a lot like losing $100. To continue the financial accounting analogy, when you buy the ticket and then fail to use it you have to “recognize the loss” in the mental books you are keeping. Going to the event allows you to settle this account without taking a loss.
    Similarly, the more you use something that you have paid for, the better you can feel about the transaction. Here is a thought experiment. You buy a pair of shoes, perhaps because they were on sale and, while still expensive, you could not pass up all that transaction utility. You proudly wear them to work one day and by noon your feet hurt. After letting your feet heal, you try the shoes again, just for an evening this time, but they still hurt. Two questions: Assuming that the shoes never get comfortable, how many more times will you try to wear these shoes before you give up? And, after you have stopped wearing them, how long will they sit in the back of your closet before you toss them or donate them to charity? If you are like most people, the answers depend on how much you paid for the shoes. The more you paid, the more pain you will bear before you stop wearing them, and the longer they will take up room in your closet.
    The same behavior occurs with health clubs. If you buy a membership to a gym and fail to go, you will have to declare that purchase as a loss. In fact, some people buy a membership to help with self-control problems regarding exercise. If I want to go to the gym and will feel bad about wasting my membership fee, then the membership fee can help me overcome my inertia in two ways: the membership fee is haunting me, and there is no immediate monetary outlay when I do go. Marketing professors John Gourville and Dilip Soman conducted a clever study at a health club to demonstrate this point. This club bills its members twice a year. Gourville and Soman found that attendance at the club jumps the month after the bill arrives, then tails off over time until the next bill arrives. They called this phenomenon “payment depreciation,” meaning that the effects of sunk costs wear off over time.
    A similar result was found by psychologist Hal Arkes, now at Ohio State University, who conducted a nice experiment