Money, Choices and Sunk Costs: How Value Gets Distorted

People who own an object ask for more to give it up than others will pay to get it. The atlas page records Richard Thaler naming the effect in 1980 and the Thaler, Kahneman and Knetsch mug study, where owners demanded roughly twice what buyers would offer. It is the plainest case of ownership changing value.

The preference for the current arrangement, shown by Samuelson and Zeckhauser in 1988 when people kept whichever option was labelled the default. The page links it to the endowment effect and to default options in retirement savings and organ donation, so it follows naturally from ownership.

Value can also come from effort. Norton, Mochon and Ariely published three studies in 2011 in which people who built furniture, origami or Lego paid more for their own work than outsiders did. The page notes that the effect depends on the task being completed, since failed effort did not inflate value.

Here the value of an option shifts because of a third, worse option placed beside it. An inferior decoy makes the option it is clearly worse than look better, even though the decoy is rarely chosen. The page ties the effect to consumer products and subscription pricing tiers.

The same person values a reward differently depending on when the choice is made. George Ainslie, whose work dates to the 1970s, used this steep short-delay discounting to explain procrastination and preference reversals. The page contrasts it with the constant discount rate of the exponential model.

People reason about money in nominal rather than real terms, so a change in the number is mistaken for a change in purchasing power. The page cites Irving Fisher's 1928 book and the 1997 Shafir, Diamond and Tversky paper, which found fairness judgments about wages and prices driven by nominal amounts.

The form of money also changes spending. Raghubir and Srivastava proposed in 2009 that people are less likely to spend a large bill than the same value in smaller denominations. The page frames it as an example of mental accounting, where money is not treated as perfectly interchangeable.

The pattern moves into investing. Shefrin and Statman coined the term in 1985 for investors who sell winning positions too early and hold losing positions too long. The page links it to loss aversion and prospect theory and to studies of real brokerage accounts.

Some people avoid information they expect to be bad. The term was coined by Dan Galai and Orly Sade, and the page gives the everyday example of not checking a bank balance after heavy spending. In finance, investors check portfolios less often when prices are falling.

Continued investment in a failing course of action, first described by Barry Staw in his 1976 paper on escalating commitment. The page gives the example of Robert Campeau paying an estimated 600 million dollars more than Bloomingdale's was worth after a bidding war, and distinguishes the effect from the sunk cost fallacy.

The path ends with giving rather than spending. People offer more aid to one identified person in hardship than to a larger group described in statistics. The page traces the idea to Thomas Schelling's 1968 essay and records experiments by Small and Loewenstein showing higher donations for a single named child.