A sunk cost lesson from Sydney’s “Live Earth” Crowd
Recently in class, we discussed the irrelevance of sunk costs. When expenditures have already been made and cannot be reversed, there is no longer an opportunity for choice. Economists say that there is no opportunity cost in this case, that “what is done is done.” This principle is illustrated in that same Sydney Morning Herald story about $50 beer that served as the basis for the previous post “Killing John Barleycorn in Sydney.”
“Scores were seen leaving within the first two hours of the nine-hour festival, fed up with the lack of basic services, cutting their losses on a $99 ticket.”
So once the $99 ticket was purchased and used, so that the ticket could not be resold, the ticket cost represents a “sunk cost” and since they face the $99 expenditure whether they go home or not, that $99 does not alter which decision is better.
Contrast this with the story that Duke Political Science Department Head, Mike Munger, tells of opportunity costs with tickets for another greenie concert, tickets for the fictional band, Green Way, in his ”A Fable of the OC.” Â
People make decisions based on opportunity costs, not dollar costs. Once the decision cannot be undone, the costs become “sunk” and no longer have an effect on choices, as the same expenditures are faced no matter which way one faces.
–MC