David R. Henderson  

Sunk Costs are Sunk: An Application to a Starbuck's Run

PRINT
The Competitive Sieve and the ... So how's the economy doing thi...

Last month I wrote the following in a blog post:

Most mornings that I don't teach, I go out early to the local Safeway, where there's a Starbuck's, and get my wife a Grande non-fat latte. Tip to men who want a long-term successful marriage: If there are things you can do that have a low cost to you and a large benefit to your spouse, do them.

I did the same thing this morning. Ever since our time in Italy in 2006, my wife has liked her coffee strong. So she gets a quad latte, half-decaf, half-regular with half an inch of room (the latter so as to concentrate the coffee.) Normally, I will taste the coffee to make sure they got it right. They almost always do. This morning, I neglected to taste it. When I brought it home, my wife started sipping it and looked immediately disappointed. It was weak. I tasted it too and, sure enough, it was weak.

I offered to go to the Starbuck's again. The round trip, if there's not a big line, takes 15 minutes. My wife said no, but I could see her disappointment. So I went, got her a new cup, tasted it, found it to my (her) liking, and brought it home. It took just under 15 minutes.

Why do I tell this story? Not (or not mainly) so that I can look like a hero. Mainly because on the way back I realized that this is a great application of sunk cost.

Think about it. I decided years ago that that 15-minute (and sometimes 20-minute) errand is worth it to me for the pleasure my wife gets out of it. MB > MC. (Marginal Benefit is greater than Marginal Cost.) The first trip today didn't work. But that's a sunk cost. I can't get that time back no matter what I do. That cost doesn't fold into the cost of getting coffee again. It's gone. Thus the new MC of getting the coffee is the same as the old MC. (The only way it wouldn't be is if my cost is higher a few minutes later. If it were a morning I was teaching or prepping for a meeting, it well could be. But this morning, all I'm doing is blogging and grading a final exam.) The MB is the same. Therefore MB > MC for this second trip.


Comments and Sharing


CATEGORIES: Economic Education




COMMENTS (13 to date)
Mike Rulle writes:

Most sunk costs arguments ignore the negative wealth effect of cumulative sunk costs. Just an observation.

David R. Henderson writes:

@Mike Rulle,
Most sunk costs arguments ignore the negative wealth effect of cumulative sunk costs.
True, but there’s almost always a good reason: the wealth effect is tiny. Even estimating my time value as high as $200 an hour after tax, the cost to me was $50. That’s a tiny tiny hit on my wealth.

vikingvista writes:

The seemingly wasted trip creates a negative memory that will make it less likely for you to forget to test the coffee in the future. The negative reinforcement of 1 cost (with disappointed wife) saves you >1 cost in the future. This one cost leads you to be wealthier over time. But then, is it truly a sunk cost, or more of an inadvertent investment?

Being somewhat forgetful, I use this psychology on myself fairly regularly, refusing to mitigate a costly mistake in hopes it will cure me of the mistake going forward.

Rusty writes:
The MB is the same.

I don't think this is necessarily correct. The MB for the first trip is the benefit of her coffee compared to having nothing. For the second trip the benefit is the better coffee compared to the first coffee. MB being the same would require the first coffee to provide zero benefit to your wife. It may have been so bad that your wife wouldn't have consumed it, but that's not clear from the post.

Rena writes:

Rusty, I would have consumed the first coffee, so it would not have provided zero benefit, but I would have felt very unsatisfied and a little pissed off (not at David but at the barista). I'm not an economist, so I don't know if or how that plays into this . . . David?

Ezra Klein writes:

Plus, the MB on this was almost certainly higher than it was on the original run given the above-and-beyond nature of the act, while the value of your time probably hadn't increased in value between Run 1 and Run 2.

Sam writes:

Ezra, will this be written up for vox.com?

David R. Henderson writes:

@Rusty and Rena,
Rusty makes a good point. But the benefit of Rena’s first coffee was really low and so the MB of the second was still quite high. Given that the MB - MC is fairly large to start with (admittedly I didn’t make that point explicit), the second run still passes the cost/benefit test.
@Ezra Klein,
On top of your making a good economic point about the subjective nature of benefits, what a thoughtful note! Thank you.

Methinks writes:

David,

It may be time to invest in a Jura coffee machine.

:-)

ThomasH writes:

Sound economics. I would apply the same lesson this way. We (federal and state and local governments) should have invested in infrastructure (and other) projects whose net present value became positive at low borrowing costs and when there was greater divergence between the shadow cost and market prices of resources (unemployment) was greater during the depth of the recession, but that is a sunk cost. We should still invest in such (probably fewer) projects now.

Matt Moore writes:

I don't think this is a sunk cost. Rather, the MB stayed about the same and the MC didn't rise up too much. You probably had other things you wanted to do that day. If you had forgotten to taste it eight more times, I think you might have stopped, even if you were convinced you would remember the next time, because you would then have been eating into things more important than the coffee.

The opportunity cost in terms of foregone activity rises each time, since you have less time to complete your day's activities, including sitting doing nothing.

David R. Henderson writes:

@Matt Moore,
You make a good point, but you lead with an incorrect sentence. It IS a sunk cost. Your discussion is about whether my MC is higher the second time than the first time. It could be higher, but very slightly higher.

Harry Mullin writes:

Great year end whimsy! Technical analysis with humor - thanks David and all responders!

But guys, far to complex with all this marginal stuff - here's the bottom line:

Happy wife = happy Life

(get the coffee ... with a smile)

Comments for this entry have been closed
Return to top