In the book Why Smart People Make Big Money Mistakes And How To Correct Them the authors Gary Belsky and Thomas Gilovich had an example for illustrating the Sunk Cost Fallacy which goes like this:
There is a basketball game tonight. It’s snowing and the roads are dangerous. You already bought ticket to the game for $150 and there is no way to sell it or give it to anyone else. Do you decide to go or stay home? What if you haven’t bought the ticket yet but you can get in for free if you go now?
Most people choose to go to the game, if they already bought the ticket, despite the road hazard. But most people decide to stay home if they haven’t paid for the ticket. The cost of the ticket is a sunk cost, something happened in the past that cannot be recovered. Rational economic theory says sunk costs should not be factored into decision making because they are irrelevant. The decision should be weighed between driving in poor weather and the joy derived from attending the game.
Does this sound familiar? You have a reservation at a bed-and-breakfast 100 miles away across some mountain roads. It’s 10:30 at night and it’s raining badly. You know it’s too late to cancel the reservation now. You will be charged for one night even if you don’t show up. The question is do you still attempt to go there or find a motel where you are now and stay put? Will you make a different decision if you didn’t have the reservation at that bed-and-breakfast?
Did sunk cost fallacy kill James Kim (news, video, donation)? Of course we don’t know what went into the decision making that night or whether they tried to cancel the reservation by calling the bed-and-breakfast. If they had called and the bed-and-breakfast allowed them to cancel, would the tragedy have been avoided?