Updated: October 27, 2020
Yesterday, I ate dinner with my parents at an Italian restaurant near our place. My dad ordered a Chicken Alfredo pasta, which he planned to eat all by himself.
Meanwhile, my mom was particularly craving for Anchovy Pizza, but she’s afraid that she wouldn’t be able to finish one whole, and we can’t order just slices of it.
So she told me, “Let’s order half-Anchovy, and half-Hawaiian pizza.”
I had a heavy snack earlier, so having half of their regular-size pizza would be perfect. My mom knows that I’m not particularly fond of anchovies, that’s why she suggested splitting the pizza with my favorite, Hawaiian.
But scanning the menu, I saw that an Anchovy Pizza costs P380, while a Hawaiian Pizza costs, P295. If I ordered half-Anchovy and half-Hawaiian, I’d still have to pay P380, the higher price between the two.
If you were in my place, what would you do?
A. Order one whole Anchovy Pizza, and forget the Hawaiian.
B. Still order the half-Anchovy, half-Hawaiian pizza.
I chose Option A and ordered one whole Anchovy Pizza because I wanted to get my money’s worth (yes, I was paying for dinner). I rationalized that if I ordered the “half-half” pizza, I’d be losing P85.
In the end, I regretted my decision. Here’s why:
Choosing Option A: One whole Anchovy Pizza
- Total cost of the pizza: P380
- My dinner experience: Just okay. I’m not fond of anchovies.
Choosing Option B: Half-Anchovy, Half-Hawaiian
- Total cost of the pizza: P380
- My dinner experience: Great, I love Hawaiian pizza!
Option B was the better choice, but I fell for the Sunk Cost Fallacy.
What is the Sunk Cost Fallacy?
A sunk cost is an inevitable expense or one that cannot be recovered. The fallacy lies when you base your decisions on the money spent, which should actually not matter anymore.
From my story, the P380 is a sunk cost because I wanted my mom to have her Anchovy Pizza.
So the only decision that I actually had to make at that point was how I want my dining experience to be.
Two Scenarios That Explain The Sunk Cost Fallacy Further
Scenario 1: You bought tickets to a concert but on the day of the event. You suddenly feel sick and feverish. Do you still go? Or just stay home and try to get better?
Scenario 2: You decided to watch a movie, which is slowly turning out to be bad. Do you stay and finish the rest of the film? Or go out and find something better to do.
In both cases, you’ve already spent the money. The concert and the movie tickets are sunk costs.
So your decision should simply be based on what you believe would give you a better experience.
If you go to the concert, you might not enjoy it, and run the risk of becoming sicker. You should just stay home, eat your favorite comfort food, and sleep early.
The same goes for the movie scenario. Just go out and meet a friend for coffee, rather than spend the next hour or so miserable inside the theater.
Well, that’s what I would do anyway.
The examples above show how the Sunk Cost Fallacy occurs in our daily lives. It’s an economic term, which is more often used in corporate finance and investments.
And now that you have understood (hopefully) what it means, you should remember it every time you’re faced with similar scenarios in your business and investing decisions, and especially when ordering pizza.
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