Money Makes People Funny

Daniel Kahneman won the Nobel Prize in Economics. The funny thing is he’s a psychologist, not an economist.

One of the many things Kahneman and his associate Amos Tversky discovered was that people hate losses to the point of making irrational decisions to avoid them. And they let sunk costs, those irrecoverable losses, influence important financial decisions. Their theater ticket experiment highlights just how crazy people can be when it comes to sunk costs:

Students were told to imagine they’d arrived at the theater only to discover they’d lost their $10 ticket. Would they spend another 10 bucks to buy another ticket? A second group of students was told to imagine they’d been on their way to buy a theater ticket, but when they arrived at the ticket booth they discovered they’d lost a $10 bill from their wallet. Would they still go ahead and buy a ticket? In both cases, it boiled down to: would you spend 10 bucks to see a play? 88% of those who lost the cash opted to buy a ticket. The first group, who lost an already paid for $10 ticket, viewed the question as paying $20 to see a $10 play — and only 46% said they would.