Reward Vs. Risk

You’ve been given a free ticket to a football game. A snowstorm the night before makes the drive to the stadium risky. Would you go? Okay: same game, same snowstorm—except this time you paid $100 for the ticket. Now would you go? According to University of Chicago economist Richard Thaler, people are more likely to take a risk if they paid for the ticket. But, as Thaler points out, “The fact that you spent $100 shouldn’t matter when you decide between the reward of seeing the game and the risk of getting killed.” Two all-too human tendencies come into play here. the first is the “sunk-cost fallacy”—the idea that having paid for something, you had better not waste it, no matter what the consequences. The second is “loss aversion”—the fact that people place about twice as much significance on a loss as on a gain. In other words, they are twice as unhappy about losing $100 as they are pleased about making $100.

Gary Belsky, Money, July, 1995