More Brain Points

    The sunk cost fallacy involves using past time and resources used towards a task as a part of the decision-making process when determining to continue on with the task.  Because these resources have already been used and there is no way to get them back, they are now irrelevant and should not be considered for future decision making.  This, however, is easier said than done.  People often have a difficult time giving up on a task after spending a great deal of time and resources on it, even if the upside becomes relatively minor.  The inability to distinguish from sunk cost and relevant factors in decision makings, can have major effects and lead to massive losses.  

    Brian Sweis et al. looks into the phenomena of sunk costs in the research paper, "Sensitivity to 'Sunk Costs' in mice, rats, and humans”.  In the paper, he seeks to uncover patterns of sunk cost analysis amongst humans, rats, and mice.  Mice and rats were placed into a maze and wait for a countdown before receiving flavored pellets.  The maze had four different “restaurants”, each with a unique flavor of pellet that they would receive after completing the waiting stage.  The mice and rats also had the option to leave the restaurant and move onto another one at any point.  Human subjects had a similar task. There were multiple categories of videos that could be viewed after waiting for a download screen to complete a download.  Humans, similar to the mice and rats, could leave the wait phase at any point.  Results were consistent amongst all species tested, the more time spent in the waiting zone, the higher chance the subject would stay.  This is the sunk cost correlation; the more time already spent on the task, the more likely the subject is to stay to complete it.  Although this study only looks at time as sunk cost, this effect can be even more influential when valuable resources are included as sunk costs. 

    In the article, “Stocks see worst day since October as tech giants make mass sell-offs”, we see a common real-life example of sunk costs.  The stock market is an excellent example to see how sunk costs influence decision making.  In the article, it describes mass sell-offs in technology based companies.  The most basic, fundamental, rule taught to those beginning in the stock market is buy low, sell high.  A common mistake amongst beginner investors is pulling out early as their stocks rise and hold on too long when their stocks drop.  For the sake of looking at sunk costs, we are interested in looking at those holding onto losing stocks.  Amateur traders typically hold on to losing stocks longer than they should because they have already spent a large sum of money on the stocks and use that sum of spent money as a justification for not selling for a loss.  However, more experienced traders may partake in these mass sell-offs described in the article in order to cut losses.  By falling prey to the sunk cost fallacy, people may lose large sums of money when making decisions in the stock market.  It is interesting to see how the development of awareness and experience with this phenomena, “subjects” (traders) are able to avoid the consequences of it.  Even as people see their losses grow and grow, they tend to hold on hoping for a turnaround due to hoping to recuperate the initial expense of the stock.  Sunk costs are seen in the market by people who buy at the peak of the growth of a stock, which will never reach those high levels again. 

    Each of these articles highlight the significance of sunken costs in the decision-making process.  Time and money spent that is already gone should no longer be considered when making decisions.  Brian Sweis’ work can be utilized in socioeconomic studies to see how people’s decision-making processes may impact markets.  Both articles highlight the significance the sunk cost correlation may have and how the awareness of it can lead to improved decision-making and problem-solving skills.  The analysis of sunk cost fallacy can be extremely influential when looking at the predicated trading patterns of large populations.

References:

Sweis BM, Abram SV, Schmidt BJ, Seeland KD, MacDonald AW 3rd, Thomas MJ, Redish AD. Sensitivity to "sunk costs" in mice, rats, and humans. Science. 2018 Jul 13;361(6398):178-181. doi: 10.1126/science.aar8644.

Stocks See Worst Day Since October As Tech Giants Make Mass Sell-offs, Associated Press - https://ktla.com/news/nationworld/stocks-see-worst-day-since-october-as-tech-giants-make-mass-sell-offs/