Sunk Costs, Pre-Orders, and Game Over

Let’s say you’re compelled to pre-order a game, maybe because the cashier at GameStop got you in a head lock and wouldn’t let you out until you agreed to. So you put down $10 towards Game A and go home, vowing to work out more so this kind of thing doesn’t happen again.

Weeks later when Game A is released, you consider whether to trek down to the store and pay the balance on your pre-order. The thing is, you’ve heard nothing but bad word of mouth and scathing reviews about the game, with one of your favorite podcasts going so far as to say that the developers should be held subject to Megan’s Law. On top of that, you’ve got a lot of other unfinished games in your backlog that you’d frankly rather spend more time with. But, thinking of that $10 nonrefundable deposit you already put down on the game, you decide to pay another $50 to do something you don’t really want to do.

What? Why? Why would you do that?

The answer is a phenomenon that psychologists, economists, and other raving lunatics call “sunk costs,” and the situation described above is a “sunk cost dilemma.” 1 Sunk costs are past expenses that can’t be recovered, like a $10 non-refundable, non transferable pre-order deposit. In a purely rational, economic model of decision-making sunk costs should not factor at all into any future decisions, like whether or not to pay the balance owed on Game A when it’s released. The money is spent, no matter what, so it’s moot.

But that’s not how people’s brains are wired. Most of us would say, “No way! I’ve put $10 towards that game and I don’t want to just lose it!” 2 But playing that pre-ordered game has no value to you, you’re just going to be throwing good money after bad. This is even more irrational when we could put remaining funds towards something else that actually has value to us, like another game that isn’t terrible.

Sunk Costs

Besides helping them plan inventory and the ability to invest that $10 you gave them, this is the big reason why retailers want you to pre-order games and will give away freebies to get you to do it: you’re as good as locked in for another $40 to $50 even if advance word on the game says it’s a bomb. Most people can’t help but honor those sunk costs even when they’ve got better things to do with their money.

And you want to know the really insidious thing? Sunk costs continue to dog us even when we’ve put the pound in after the penny. Ever feel compelled to see a game through to its completion or spend some more time with it even though you’re not enjoying it but you feel like you have to justify spending money on it? That’s totally sunk costs at work on you again. But you keep playing because you figure it’s not THAT bad. Robyn M. Dawes even describes in his book Rational Choice in an Irrational World 3 how this is pretty much the same logic that a heroin addict would use to avoid treatment before reaching rock bottom. Yeah. Think about THAT.

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Footnotes:

1. Arkes, H. R. and Blumer, C. (1985). The psychology of sunk costs. Organizational Behavior and Human Performance, 35, 129-140.
2. This also ties into another phenomenon called “loss aversion” but I’ll talk about that elsewhere.
3. Dawes, Robyn M. (1988). Rational Choice in an Irrational World, Harcourt Brace Jovanovich.

10 thoughts on “Sunk Costs, Pre-Orders, and Game Over

  1. Hey Jamie, exposed to your blog through Gamepolitics. I’m a 3rd year in a clinical PsyD program and am glad to other gamer Psych minded people out there. I almost did my dissertation on MMO addiction and so your blog is definitely added to my reader. You’ll probably see me commenting on your posts pretty frequently.

    This makes sense for pre-orders where the 10 dollars is actually sunk, but I believe Gamestop (the main offender) will return your money with no questions asked if you go down to the store and say you decided not to buy it or got it somewhere else. The sunk cost you’re talking about is sort of related to throwing good money after bad in stocks etc, but when you’re able to get the money refunded, I don’t think it really applies as much.

    I think it might have more to do with two other concepts. One is that you even though the money isn’t actually sunk, you have a perception that the game is partially yours and if you think about buying that game, you will most likely return to the place you pre-ordered it. Also, it modifies the perceived cost of the game. Paying 10 dollars is no big deal. Then, when the game releases, the perceived cost of the game is 50 dollars at the Gamestop you pre-ordered at and 60 dollars everywhere else.

  2. @Brian Newton
    Yeah I fudged the story a bit by specifying that the pre-order deposit was non-refundable and non-transferable (though even with a transferable deposit they’ve still got you honoring sunk costs on SOMETHING).

    The other thing you described sounds kind of like what’s known as “the endowment effect” and may very well be in play, though in drafting these stories I’ve found that they make better reads when I stick to one concept at a time.

    Regarding the $50 cost, though, that’s still beside the point. You’re still looking at paying $50 for something that has no value to you or at least less than $50 worth of value. It’s still irrational to spend it.

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  4. Is there a tendency for a player to complete Game A even when they know, with certainty, that they’d enjoy Game B more? In this case, is it really because of “sunk cost” or is it because of some other tendency (e.g., predisposition towards being a completist?)

    Another explanation is that they simply don’t know how much they’d enjoy an alternative experience, and don’t want to risk that it could be even worse. Colloquially, we’d call this the “devil I know” situation–I’m wondering if there’s a psychological basis for this as well.

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