Skip to content

Sendhil Mullainathan, Steve Levitt (and Alex Tabarrok) on sunk costs and status quo bias

This was a great episode of People I (Mostly) Admire. The section comes at around the 15 minute mark as they finish a discussion about a brilliant game illustrating how people respond to sunk costs …

Sendhil Mullainahtan: I think a lot of sunk cost fallacies play out like this $20 bill auction. They’re like these little escalation of commitments… It’s like, you’re in a bad relationship. “Let’s give it another week.” Okay, but a week from now, where are you going to be that’s that that different from today? “This project doesn’t look that good – let’s give it another ten thousand dollar investment and let’s see how much-” So there’s this element of the thing where you spend some resources, put yourself actually ironically not that different from where you started, and you don’t step back and say, “Where does this whole thing end?” Locally every single extra dollar seems to make sense, but if you step back, you’re like, “Where does this thing end up?”

Steve Levitt: I woke up in the morning for maybe five straight years, and the first thing I thought about was,
“Should I quit my job as a professor?” And every morning I thought, “God, I would so like to quit… but I can always quit tomorrow, and maybe something will happen today that will make me change me mind.” And so I literally delayed my decision, because I had this third option, which is, well, “As long as I wait till tomorrow the cost of waiting is really small.”

If you just had to make a decision, “I’m either going to play this game until I’m dead, or I’m going to stop now, everyone would stop now. It’s the fact that you introduce this third option, which is like, a wasting away option – that completely defines my life, I would say my entire life that has been my rule of decision making.

SM: Your point about deferring until tomorrow is so profound, because I think there’s a deep psychological bias, that you tend to think tomorrow will somehow be different. It shows up in so many aspects of life, where if you just say to yourself, “If tomorrow was a repeat of yesterday, how would I behave differently?” and so many things change. There’s an employee, they’re not that good, they haven’t done very well, and you’re like, “Well… let’s give them a chance.” The first time giving them a chance may make sense, but after four times you’re like, “If tomorrow is going to be a repeat of yesterday, what am I doing?” And that simple heuristic, tomorrow is a repeat of yesterday, really cuts through a lot of clutter, like so much decision clutter.

People I (Mostly) Admire Ep. 37

By coincidence, today Alex Tabarrok posted an interesting illustration of status quo bias with reference to Covid-19 vaccinations

I'd love to hear your thoughts and recommended resources...