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#45: Throwing Away Good After Bad

#45: Throwing Away Good After Bad

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Welcome to another Mindf*ck Monday, the only weekly newsletter that always “forgets” its wallet. Each week, I send you three potentially life-changing ideas to help you be a slightly less awful human being.

This week we’re talking about the sunk cost fallacy and 1) how it relates to emotions and relationships, but also 2) how it relates to the choices we make during the pandemic, and 3) fun, real-world experiments with sports in empty stadiums. 

Let’s get into it.

1. Throwing good relationships after bad – In economics, there’s a concept known as the sunk cost fallacy. The sunk cost fallacy occurs when someone makes a decision based on their previously invested time or resources. 

The classic example occurs when you buy something that you end up not needing or enjoying, but you force yourself to use it anyway because you don’t want the money to go to waste. You’re actually making yourself less happy than if you simply discarded it because you want to justify the money you spent. 

Another example is when a company spends a ton of money on an ad campaign that bombs. But rather than discontinuing the campaign, they need to feel like they got some return for all of the time and money invested, so they continue to run it even though it loses money.  

The sunk cost fallacy is sometimes referred to as “throwing good money after bad.” 

People don’t want to quit the job that underpays them because they don’t want to feel as though they wasted the last five years of their life. 

Businesses don’t cut wasteful spending because management doesn’t want to admit they were wrong about something. 

Governments don’t surrender when losing a war because they don’t want people to feel as though their soldiers died for nothing. 

In economics, the sunk cost fallacy is seen as purely irrational. Bob should quit his job at Acme. He can make more money elsewhere. But Bob stays. Why? Because Bob trained for years to work at Acme and he doesn’t want that training to be “wasted.” 

But the sunk cost fallacy usually only appears to be a fallacy because we measure the output in terms of money. The truth is that when weighing whether a major decision is worth it or not, our emotions add a lot to the scale. Perhaps Bob doesn’t leave Acme because he values his pride and his identity as an Acme engineer more than he does the extra money he’d make elsewhere. Perhaps he’s afraid of dealing with the uncertainty of the job market. Perhaps his closest friends work at Acme and he’s afraid of leaving them behind. 

While economists focus on the financial irregularities of the fallacy, to me, the fallacy is most illustrative when we look at the emotional side effects. For example, the most common place I see the sunk cost fallacy is not in a casino or in business or in government. 

It’s in relationships.

We all know someone (or perhaps we are that someone) who is in a bad relationship and continues to stay in that bad relationship. Neither person is happy. Everybody knows they aren’t happy. Yet the two people stay. For years and years and years, people hang on.

And why? 

It’s easier to fight the sunk cost fallacy in work situations and financial situations because you can actually sit down and do the math. But there’s no math for relationships. There’s no spreadsheet to calculate the expected costs of the pain of breaking up versus the misery of coming home every day to somebody you don’t want to see. 

But when it comes to emotions, we are terrible at accurately gauging how we will feel in the future and how important those feelings are. 

For example, we generally overestimate the significance of feeling a large amount of pain today and underestimate the significance of feeling small amounts of pain over years and years.

Therefore, we stay in a bad relationship. We stay in the shitty job. “I’ll just give it another year,” we say, because another year feels bearable in the moment. Whereas destroying our relationship feels unbearable. 

In this sense, we throw away good relationships after bad. Because every year we stay in a bad relationship, we’re missing the opportunity to find a good relationship. 

And while, on paper, that may be easy to see, it certainly isn’t easy to feel. 

2. Throwing a good pandemic after bad – Months ago, I wrote in this newsletter about a phenomenon I labeled, “FOGO,” or “the fear of going out.” In opposition to FOMO, or the fear of missing out, I argued that FOGO would be a part of our lives for much of 2020 and 2021 because even once the pandemic has subsided, many people will err on the side of caution and remain anxious to expose themselves to any risks. 

While it’s not clear if the pandemic has subsided for good or whether it’s merely taking a summer vacation, we have already seen quite a bit of evidence for FOGO around the world. 

In Wuhan, China, where the virus originated, even after cases dropped to zero, economic activity and consumer spending took months to approach normal levels—i.e., people stayed home even when they didn’t need to. 

Similar patterns have occurred in Taiwan, South Korea, and even Sweden. What’s interesting is that all four of these countries had completely different approaches to the virus. China went hardcore lockdown. Korea locked down a bit and traced aggressively. Taiwan traced aggressively and didn’t lock down. And Sweden didn’t do much at all. 

Yet, they all experienced similar drops in economic activity and consumer spending. And similarly sluggish economic recoveries. 

This suggests that the lockdowns—or any government policy at all—wasn’t the root of the economic slowdowns. 

FOGO was. 

Whether your government closed everything and made you stay home or didn’t do a damn thing, the result has been the same, people are afraid of going out. 

Tyler Cowen wrote in Bloomberg this week about a similar effect happening now in the US: in many parts of the country, cases are low enough that it makes sense to open up, but most businesses, schools, offices, and churches are resistant. 

Why? Nobody wants to be the guinea pig. Nobody wants to be the one to cause the next outbreak. It’s the sunk cost fallacy. Call it, “throwing a good pandemic after bad.” 

I even notice this type of irrationality happening within myself. My wife and I have been more careful than most throughout the pandemic. We barely left our house for most of March, April, and May. We didn’t see anyone in person other than our doorman until probably mid-July. 

In the spring, I felt that most people were being irrationally optimistic and careless and our reaction was reasonable (especially given that we live in New York City). For what it’s worth, I still believe that (although, obviously I’m biased). 

But currently, I believe my wife and I are probably being irrationally fearful. We still rarely leave the house (maybe once or twice a week, max). We have only hung out with friends a handful of times (always outside and with masks). Looking at the data, New York City is actually currently in a great situation. There are only a dozen new cases each day in a city of over 10 million people. Deaths are approaching zero. Research shows that the city has potentially achieved some degree of herd immunity. The risk, at the moment, is extremely low here. 

Yet, every time I go out and see people, I ask myself, “Is this worth it? What if a second wave is beginning and we don’t know it yet? What if I’m one of the few unlucky ones who gets it and has severe symptoms that persist for months? I stayed home for six months already. Why screw up all that effort just to enjoy a bagel with a friend? Yeah, I think I’ll just stay home a little bit longer.”

Apparently, I’m as immune to the sunk cost fallacy as I am to COVID-19—i.e., not at all. 

3. What we always suspected about sports is apparently true – Let’s end on a fun note, shall we? Sports are back… Kinda. And while I’m not the biggest sports fan, the current situation of games occurring in empty stadiums and arenas has offered an interesting opportunity for researchers.

Any sports fan knows that home teams are perceived to have an advantage. And many have long-speculated that referees favor home teams when making calls. The reason why isn’t hard to deduce: when you blow a whistle and know that 40,000 people are either going to love you or hate you depending on what you say, there’s no human on Earth who isn’t influenced just a little bit. 

Yet, for years, the data on home-field advantage in sports has been mixed. It’s varied quite a bit by sport, by team, and by season. Some have argued that it has disappeared due to the widespread usage of slow-motion replays. 

Well, the pandemic has conveniently provided what researchers refer to as a “natural experiment.” Games are being played without fans present. It’s weird watching games with empty stadiums and arenas. But researchers have already scooped up the data and measured whether the lack of audience has much of an effect on the game or not. And the results are both cool, and not surprising. 

It turns out that, yes, fans do influence the game. 

One study found that in European soccer matches, referees give more yellow cards to visiting teams when the home crowd is present versus when the stadium is empty. 

Another dataset using Major League Baseball games found that, historically, home teams typically win 53-55% of their games. In 2020, that has dropped to an almost even 50/50—suggesting that the home crowd gives them the home-field advantage, not the fact that the team doesn’t have to travel. 

So maybe you can’t see your favorite team right now. But know that when you can return to the stadium, your cheering does make a difference. 

See you next week,
Mark