You’ve purchased two tickets to see the Lakers game, at a cost of $550. Just before you head out, it begins to pour. Knowing Los Angeles traffic as you do, you realize it could easily take two hours or more to get downtown, which means you are likely to miss the first half and might not arrive until the final 15-20 minutes of the game.
Alternatively. you can stay home and watch the whole game from the comfort of your family room, on your 60 inch flat screen TV. If you hadn’t already purchased the tickets, you’d opt to stay home. But you spent $550 on the tickets, so you hit the road.
Rational? Hardly. The money has been spent whether you go to the game or not, so why should your decision be different just because you already purchased the tickets? The answer lies in the fact that your hard-earned money is gone, but not forgotten. You believe you will feel better having spent the $550 on 15 minutes than you will having spent it on nothing.
You’ve fallen victim to what behavioral economists refer to as “the sunk cost fallacy,” the notion that prospective decision-making is frequently impacted by taking into account retrospective or “sunk” costs, i.e., costs we have already incurred.
It’s easy to see how the “sunk cost fallacy” can lead litigants to make irrational decisions in the mediation process. Having invested significant time and resources into the endeavor, the parties are loathe to walk away without something to show for their efforts.
The “sunk cost fallacy” often leads to an even more perplexing problem in decision-making, referred to as the “sunk cost dilemma” — the tendency to commit more and more resources to a venture in the hopes of increasing the likelihood of success, rather than accepting the losses already incurred, thereby creating a snowball effect which, not surprisingly, makes it increasingly more difficult to find an exit strategy.
When clients fixate on “sunk” costs, great pains must be taken to refocus their attention from the past to the future. How much more are they likely to spend if the matter remains unresolved? What outcome can they realistically anticipate if they actually commit those additional resources? Is the net result likely to be better now or later?
Sometimes, despite your best efforts, the only practical option is for the client to cut their losses. It’s a painful choice, but one which will better serve their interests in the end. When the costs incurred are gone, but not forgotten, the burden rests with you to remind them of that fact.
As always, I would be pleased to assist you and your clients in the dispute resolution process. Please don’t hesitate to contact me if you think I can be of service.
Wishing you and yours a very happy holiday season,
Floyd J. Siegal