Richard Thaler

Then we say, all right, now you go and drink one of those bottles that you bought 20 years ago.

What does it feel like you're doing?

Are you spending or drinking?

And they say, oh, I'm not spending.

I paid for that 20 years ago.

It's free.

So that's kind of funny mental accounting.

They don't feel like they're spending when they buy it.

They don't feel like they're spending when they drink it.

This is a good deal if you're the seller, if you can get people to think this way.

And one thing that comes up with mental accounting is something that economists call the sunk cost fallacy, S-U-N-K.

And the idea is you paid for something, you and your partner bought tickets to a very nice concert for tonight, and you get a phone call that says,

An old friend is stuck at the airport and has to spend the night in your town and is free for dinner.

Would you like to go see the friend?

But you have these expensive concert tickets.

And let's stipulate that on any night you would rather go see this friend than that concert.

But you paid all that money for those concert tickets.

People are going to struggle with, should I waste the money I spent on those concert tickets?

Or should I do the thing that I would really like to do, which is go see my old friend?

So economists say, ignore sunk costs.