In a lecture this week a professor spent considerable time explaining sunk costs.  Those are costs that a person has already spent, and regardless of what their next decision is, those costs will not be reimbursed, and hence should have no effect on the next decision.  One example was a person who had purchased a ticket to an event when something else comes along that the person would rather do.  The professor said that if the person were a rational decision maker they would make the decision about going to the event with the previously purchased ticket or going to the new event independent of the fact that the ticket was already purchased.  But we all know that the fact the money has been spent will weigh on the mind of the decision maker and that person may well go to the previously scheduled event just to make sure that ticket money wasn’t wasted.

Another example used in lecture was people that tend to stay on a certain path on which they have already invested a great deal of time or money rather than accept that the path is heading in a way that will never be successful.  The specifics she talked about related to research, that people stick with a line of research even if it becomes obvious that the end result would be less than optimum.  Her point was that it was much better to abandon the research even though much had been invested, because those investments were “sunk costs” that would never be retreived.

This lead me to wonder why anyone has motivation to work on  difficult situations.  Why work through problems in a relationship or at work?  If a rational decision maker would know the previous work was a sunk cost and not recoverable, would that rational decision maker cut their losses and leave as soon as the going gets tough?  What keeps us trying to make things work?  Are we being irrational?