“Pawn Stars” and the Sunk Cost Fallacy

by mzumtaylor on December 4, 2010

My husband and I have been watching Pawn Stars on Netflix Instant Queue. For those of you who are unfamiliar, Pawn Stars is a reality show on the History Channel that follows a family-owned and -run pawn shop in Las Vegas that does a lot of interesting trade in antique weaponry, American Memorabilia, and a bunch of other random and fascinating things. Someone described it as “Antiques Roadshow” meets “American Choppers,” which is certainly an apt description.

We both love the show for the historical tidbits and the interesting items that come through the pawn shop, but I think it’s a fascinating study in how people deal with the sunk cost fallacy.

The Sunk Cost Fallacy

A “sunk cost” is how much money you have invested in something. A car, a set of baseball cards, a home, a business, a marketing plan, a stock, etc.

Logically and rationally, when making a decision about an investment, you should only consider the future costs of it, but most people put a much greater focus on how much they’ve already invested: this is the sunk cost fallacy.

Okay, how about some plain English, please?

People who come into the pawn shop on “Pawn Stars” to sell or pawn their items often fall prey to the sunk cost fallacy.

Example 1: Say you had an antique car that you bought for $8,000 with the intention of restoring it. You put another $3,000 into restoring the vehicle before you realized that it was too big of a job for you, and you’d be better of getting rid of it. You take it to the “Pawn Stars” pawn shop and offer to sell it to them. They bring in an expert who says that the car will take $5,000 to fix up, but will then be worth $25,000.

They offer you $8,000 for the car, because they have to make a profit after repairs. What do you do?

Sunk cost: $11,000

Offer: $8,000

You could probably negotiate them up to $10,000 but they won’t go any higher, so now what do you do?

New Offer: $10,000

If you’re like most people, you’re thinking that if you get $10,000 for the vehicle, you’ve lost $1,000. That’s the sunk cost fallacy at work.

Why it’s a fallacy to consider sunk costs:

If you don’t take their offer, you still have a car on your hands that you’re not going to do anything with. And that may well be costing you money to store. (Future costs.)

If you do take their offer, you have $10,000 more than you had five minutes ago.

Even if you ran up debt to fix the car — say all of your repairs were put on a credit card — you would still have $7,000 more than you had before after paying off that debt.

Some people even consider sunk time as a cost

Often on the show, people will bring in items that have been handed down through their family. Effectively they paid nothing for the item, but they’ve had it for a long time. If the item is worth anything (they aren’t always), even if the pawn shop is not willing to give them full resale value, they should take the money.

Example 2 Say you bring in a vase that has been passed down through your family for generations. Its pretty enough, but it’s not your style and you think it might be worth some money. You bring it to the pawn shop and they bring in an expert who tells them its a relic from WWII Germany and it’s worth $1,000 at auction. The pawn shop offers you $200 for it.

Sunk cost: $0, but 3 generations

Offer: $200

You now know that you might be able to get $1,000 for it at auction, but that would mean finding an auction house and a bunch of other steps, plus more time. The future costs are unknown, but could be expensive.

You might want more than $200 for it, but you weren’t going to do anything with it, so why not take the $200? If you want more, you could always try to negotiate, but they probably wouldn’t go much higher than $250 or $300.

The point is, you could have $200 in your pocket right now. Never mind that you’ve had the thing for ages, never mind that you could possibly get more for it at some unknown later date, why not take the money now.

(It boggles my mind what some people walk away from on that show.)

Don’t let the sunk cost fallacy get you down

A more common every day example of the sunk cost fallacy is prepaid movie tickets.

Example 3: You buy tickets to a movie in the morning because you’re worried the show you want to see that evening is going to sell out. Come evening, after a long day at work, you don’t really feel like going to see a movie. You’d much rather sit at home and relax, and not face the traffic and the crowds, and so forth. But you’ve already paid for the tickets, so what do you do?

If you’re considering sunk costs, you would go to the movie, even though you don’t want to, because you’ve already paid twenty-some odd dollars for it.

If you were not considering sunk costs, you would stay home and have a pleasant evening in, possibly drink a beer or a nice glass of wine and spend time with your loved ones.

Which sounds better to you?

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