Throwing good money after bad is one thing, throwing money after time spent, is even worse.
I wrote a blog entry about "walking away" from bad deals, several years ago. As a consumer, it is the only weapon you have, really, and today we see people failing to use it. Inflation - artificial inflation - is driving up prices, and rather than cutting back on spending (as Adam Smith predicts we should do) people are spending even more and just whining about how expensive everything is.
That may be about to change, of course. Camping World sends me an e-mail yesterday, touting their "liquidation specials" on 2022 Campers for sale. Here it is, in July of 2023, and they have leftover inventory from last year. Funny thing is, many camper chassis (for motorhomes) are stored in inventory, so many consumers may be chagrined to buy a "2022" camper, only to find out the chassis is titled as a 2021!
Meanwhile, my inbox is flooded with messages from companies I did business with in the past - often yeas ago - touting sales and discounts. I haven't heard from them in ages, and now they send me e-mails once a week - or more! Maybe people are starting to walk away - particularly from things they really don't need, like an RV or a new pair of glasses or whatever. When money gets tight, these are often the first things to be put on hold.
But I digress.
Walking away from a bad deal is the only weapon you have. And if enough people did it, bad deals would not exist. But it takes time - there is hysteresis in the system. People pay a higher price and grouse about it and think, "Well, maybe next week the price will go down, and in the meantime, I will just put this on my credit card!" They refuse to "walk away" and maybe buy less or seek an alternative. And given how obese America is, you would think that buying less would be an attractive alternative.
Walking away is related, in part, to the Sunk Cost Fallacy. As I noted in that previous posting, people will keep throwing good money after bad, convinced that since they "spent so much already" they might as well finish the deal. This is what gets nuclear reactors built - even after they have bankrupted contractors and utilities (and raised rates for consumers).
Worse than that, many people will refuse to walk away, simply because they have time invested in a deal. Again, the car dealer. You spend hours negotiating a deal on a car and the dealer keeps jerking you around. Subconsciously (or even consciously) you think, "I've spent hours on this, if I walk away now, I would have to start all over again at another dealer! I have too much time invested in this deal! I will go home with this car, come hell or high water!"
And the dealer thinks, "Excellent! Now to sell him undercoating and paint sealer!"
Of course, the best way to deal with this sort of thing is to bail early before you invest too much time. You will be less inclined to waste time on the deal if you spot it as a raw deal early on. How to do this? The easiest way is if they lie about something - no matter how trivial the lie is. Liars play their hand early - often to test you. If you let a small lie slip by and don't say anything, they know they can pull a whopper on you later on.
And sometimes, they pull the whopper early on. When we bought the hamster, we wanted one with every single option (the "whole shebang" package) and the nappa leather and sun and sound package (with panoramic sunroof and infinity sound system) - in fathom blue. We called a dealer in Jacksonville and they claimed to have one in stock. We drove down there and they wanted the keys to our car to "evaluate it for trade" (we declined) and the young salesman showed us the car - a mid-level model in black, with a black interior and a steel roof.
"That's not the car we talked about!" I said. "It's close!" he replied, "and I can give you a good deal on it!" His "good deal" was, of course, $1000 more than what we ended up paying for what we wanted. We were pissed - driving over an hour to see the wrong car. And I suppose a lot of people would think, "Well, I drove all this way...." Sunk Cost Fallacy.
But he lied, and lied bad, and the "deal" would go downhill from there. There are merchants like this, and they are indistinguishable from honest merchants - from outside appearances. You can sort of suss them out, however, by how they advertise and their promotions. The local Toyota dealer, for example, sends me fake "car keys" in the mail, telling me I won a new car - just pop down to the dealer to check it out! Fine Print: You have won nothing. They tout monthly payments but never prices. On the few occasions they put a price (in 2-foot high stick-on letters) on the side of the car, it is clearly the price of a stripped model (not in stock, on back-order) and not the model the price appears on. Little lies, but lies nevertheless. You deal with liars, they will screw you, period.
We did buy the hamster - the one we wanted with all the options in the color we wanted, at a pre-negotiated price, at a dealer in Charleston. Yes, it was a bit of a drive, but even then, we were prepared to leave if even one iota of the deal we negotiated over the phone was changed.
So why do people fall for these scams? Well, like I have noted before, many people fall for the notion that they are "lucky" to get a loan (and that a loan will solve all their financial problems, as opposed to throwing gasoline on the fire) and that buying a car is a special treat that only the lucky few with a good credit rating will ever get. The harsh reality is that a lot of cars (I suspect the majority) are sold using onerous financial instruments and that repossession is the expected outcome of the transaction - and the dealer still makes money on the deal and the finance company comes out ahead as well.
Once the poverty mindset takes hold, it is hard to shake.
But Sunk Cost Fallacy happens in other areas of our lives as well. A young man throws thousands of dollars trying to "hop up" an economy car. The results are, well, less than expected. No worries, the super-car of your dreams is just one turbo-kit away! You've already spend thousands on a fart muffler, lowering springs and a cold air intake - why not finish the job!
Of course, what happens is that the young dude spends more on this nightmare than he would have spent on a nice used performance car which would hold its value better and provide the real performance an econobox never will. The money spend on after-market bolt-ons is just down the toilet, particularly after the turbo blows the head gasket.
It is a hard thing to shake, too. In your typical consumer car scenario, the owner spends thousands trying to repair an older car, thinking, "this has been a good car, I should keep it!" But after he spends more than the book value of the car in repairs, he realizes that the repair bills will never end, as the vehicle is near the end-of-life, much as a roll of toilet paper eventually runs out. Too late, he decides to move on. If we can see these scenarios coming, we can save ourselves a lot of money and grief. That's why I say it is a good rule of thumb that if a repair cost exceeds the book value, it is just time to walk away, even if that means junking the car. Sometimes this is true even if the repair cost is just a significant chunk of resale value.
The problem being, of course, once you've thrown $3000 at replacing the head gasket in your Subaru, you think that maybe it is worth spending more to fix something else that breaks. After all, you don't want that $3000 to go to waste!
Like I said, it is hard to spot these things, often until it is too late.
In the business world, Sunk Cost Fallacy runs rampant. A manager promotes an ill-fated scheme or product and it backfires badly. The company spent millions already, and it will cost millions more to fix the problem. Like I said, this is how nuclear reactors get built - but replace "millions" with "billions".
The problem for the manager is that, if he pulls the plug on the project, he admits failure and has to take responsibility for the losses. If they throw more money at the problem, perhaps they can keep the whole enterprise going until he retires. Only then does the company realize they lost money on every unit sold.
In government and the military, the results of Sunk Cost Fallacy are tragic. We spent decades in Vietnam, Iraq, and Afghanistan, throwing more bodies on the pile, good money after bad, trying to build democracies in countries foreign to the concept. We can't just pull out! Think of all the lives that were lost! Did they die in vain?
Sadly, many today still cling to the belief that "if only" we had stayed on in these countries, that the wars could have been won and the corrupt governments be magically transformed into representative democracies. It never would have happened.
But Sunk Cost Fallacy strikes again.
Many criticized George Bush (the first) for withdrawing in Desert Storm once Kuwait was liberated. He realized that if he took the war to Baghdad, it would have ended up as an occupation lasting decades. Sadly, his son never took his Dad's advice.
Of course, the granddaddy of Sunk Cost Fallacy lies in gambling. You've already spend hundreds if not thousands, at the casino or on lottery tickets - you can't stop now! You may win it all back! That's the line my "friends" used on me during a "friendly" game of poker. I found new friends. It also illustrates the best way to avoid Sunk Cost Fallacy:
Simply don't get started.
