Sunk Costs and The Sense of Self

My 3 year-old will scream. She will lay on the floor, thrash about, and make demands as an infant would if they could communicate and develop the motor control adequate to do so. It doesn’t matter whether she can remember the reason for her disposition – she will continue. My wife and I usually sense the situation. We could get angry and threaten punishments. Alternatively, we know that no amount of reasoning and attempts at persuasion will convert our daughter’s behavior into the sweet, desirable sort. We have found that smothering her with love works best. And when the demands of other children prevent such single-minded attention, we at least try to act lovingly toward her.

My wife is quite beside herself. Why is this happening? (Truth be told, it’s all my fault. It’s in the genes.) Sometimes we see the momentary consideration of a calmer world in our daughter’s face. Then, she rejects it like there is no goodness left in the world. To be clear: I see my daughter know that she can stop her comprehensive riot and instead enjoy some other activity, then definitively decline the opportunity. She has cognitive dissonance.

My child is not crazy. One might say that she is irrational. The entirety of her behavior up to that point is a sunk cost. She could just stop the outburst and feel better. But she doesn’t. Why the heck doesn’t she?

Economists point to this behavior and say that it is an error. That my daughter would be better-off if she acknowledged her already expended effort and switched to the more enjoyable activity of cuddling and having a snack. But, it is the economist who makes the error.

My daughter enjoys her sense of self. If my daughter instantly stopped her exertion and relaxed, then that would do three things. 1) It would deny the effectiveness of her efforts up to that point. 2) It would deny the reason for her initial outburst as an affront to her sensibilities. 3) It would be a submission to the will of her parents. My daughter will indulge in the fantasy of being wronged so that she can avoid these costs. She indulges in the pretend. My daughter is trying to maintain the conception of herself that would be tarnished if she were to admit defeat/mistake.

Nobody wants to think of themselves as having wasted their time. When an economist sees people finishing a bad movie, a bad book, or continuing to argue, the claim is that they are acting irrationally or sub-optimally. But utility maximization and choice theory rest on axioms. The question is not whether people are rational. The question how they are rational.

Some people enjoy the version of themselves that they strive to be. We have a bias in favor of finishing things (in the US – and elsewhere?). We want to be a person who can proclaim “I finished War & Peace” and not the person who says “I didn’t think that it was worth my time so I stopped after 100 pages”. We want to be the fan who has seen all of the sequels and watched all of the episodes. We want to be a person who does things intentionally, with good reason and not a person who made an initial error in judgement.

When people allegedly fail to think on the margin and they engage in the sunk cost fallacy, they are doing anything but. We are considering how our change in behavior will be observed by others. We’re worried that changing our mind will be an admission of prior error – and no one wants to think of themselves as ‘one who makes errors’. The truth is that people are, in fact, thinking on the margin. Changing one’s own poor behavior is not merely to consume more optimally. Changing one’s own behavior also requires that we conceive of our previous self in a less praiseworthy light. The marginal cost of changing allegedly suboptimal behavior entails acknowledging the painful gap between who you are and who you imagine yourself to be. We value our sense of self so much, that we’ll incur substantial pecuniary and emotional cost to avoid degrading it.

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