Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats Sunk Costs as Non-Negotiable
Transcript
- Lucas: So here's a number that still makes me wince: the Concorde supersonic jet. The British and French governments spent roughly one point seven billion pounds developing it. And it never once turned a profit. Luna: That's the textbook example of the sunk cost fallacy, isn't it? I've read that they kept pouring money in long after it was clear the economics didn't work. Lucas: Exactly. And the crazy part is they knew it. By the mid-seventies, internal forecasts showed the Concorde would never break even. But they couldn't stop. Too much national pride, too many jobs, too much political capital already spent. Luna: So the sunk cost — all that money already gone — actually drove them to spend more. That's the trap. Lucas: That's the trap. And it's not just governments. You and I do it all the time. You buy a ticket to a movie, ten minutes in you hate it, but you stay because you paid fourteen dollars. You're not getting that money back, but your brain treats leaving as a loss. Luna: I definitely do that. I sat through a three-hour art film last month just because I'd paid for the ticket. Hated every minute. Lucas: Right. And behavioral economists call this the sunk cost fallacy. The idea that we factor in costs that are already gone and can't be recovered. It's irrational, but it's incredibly powerful. Luna: Why does it feel so hard to walk away? I know the money's gone, but it still feels like I'm wasting it if I leave. Lucas: Because your brain is wired to avoid loss more than it seeks gain. That's loss aversion — it was discovered by Kahneman and Tversky. Losing fourteen dollars feels about twice as bad as finding fourteen dollars feels good. So staying in the movie feels like you're saving the money, even though you're not. Luna: Wait, so by staying, I'm actually losing something else — my time. And I'm not even accounting for that. Lucas: That's the double whammy. You lose the money, then you lose the time. The sunk cost fallacy makes you double down on a bad decision because quitting feels like admitting failure. And nobody likes that feeling. Luna: So what's the best way to escape it? I'd love a mental trick I can use next time I'm in a bad movie or a bad investment. Lucas: The best one I know is called the 'non-owner perspective.' Ask yourself: if I hadn't already paid for this, would I spend the money now? If the answer is no, walk away. You're just letting the past dictate the present. Luna: That's good. But it's hard in practice. When it's a big project at work, or a relationship, the stakes feel higher. Lucas: Absolutely. And that's where escalation of commitment comes in. Managers keep funding failing projects because they were the ones who approved them. It's ego, it's reputation, it's fear of looking stupid. Luna: And the bigger the project, the harder it is to kill. The Concorde was a national symbol. You can't just scrap that. Lucas: Right. And that's why pre-commitment is powerful. Set a clear exit criteria before you start. If you hit these milestones and they don't work, you pull the plug automatically. No emotion, no sunk cost. Luna: I've heard that some venture capital firms use that. They stage their funding so they can cut losses without the founder feeling like it's a personal failure. Lucas: Exactly. And it's not just for investors. You can use it in your own life. Say you're thinking of a gym membership. Before you sign up, decide: if I don't go twice a week for two months, I cancel. Then when the time comes, you're just following the rule, not fighting the bias. Luna: But what about when you've already fallen into the trap? Like, you're in the middle of a project that's clearly failing. How do you pull yourself out? Lucas: The most effective tool is to reframe the decision. Instead of 'how much have I already spent?' ask 'what's the best use of my next dollar?' That future-focused question cuts through the sunk cost. It's the basis of zero-based budgeting — you start from scratch every period. Luna: That's a really concrete shift. I'm going to try that next time I'm stuck in a bad movie. Lucas: And on that note, if today's conversation helped reframe something for you, honestly, if it was worth a coffee, you can find us at buy me a coffee dot com slash fexingo. It's a small way to keep this show ad-free and exactly what it is. Luna: Yeah, and we really appreciate it. No pressure — just if it made a difference. Lucas: Exactly. So back to sunk costs. One study I love found that people who prepaid for a season pass to a ski resort went more often than those who got the pass free — even though both had already paid nothing at the margin. The prepaid group felt like they had to 'use it up'. Luna: That's wild. So the sunk cost fallacy applies even when the cost is already paid and non-refundable. It's not about the money anymore — it's about the feeling of waste. Lucas: Right. And marketers know this. That's why you see 'pay in advance' models everywhere — gyms, software subscriptions, event tickets. They're banking on the fact that you'll feel compelled to use it, even if you don't want to. Luna: Or that you'll forget to cancel. That's another bias — the status quo bias. You just let it renew. Lucas: Exactly. So the takeaway is: when you're making a decision, ignore what you've already put in. Look only at what you'll get going forward. That's the rational path. It's hard, but it's the only way to avoid the Concorde trap. Luna: And if you're in a position where you're advising others, like a manager or a policy maker, you have to build systems that protect against it. Lucas: Yeah, bring in outside voices who have no stake in the past. That's why some companies have a 'red team' that challenges projects. They're not invested, so they can see the sunk cost clearly. Luna: That's a good note to end on. Next time, let's talk about the endowment effect — why you overvalue what you own. I think that's another piece of the puzzle. Lucas: Absolutely. We'll see you then.