Kluge: The Haphazard Construction of the Human Mind (Houghton Mifflin; 2008)

Here's an even more telling example. Suppose you spend $100 for a ticket to a weekend ski trip to Michigan. Several weeks later you buy a $50 ticket for another weekend ski trip, this time to Wisconsin, which (despite being cheaper) you actually think you'll enjoy more. Then, just as you are putting your newly purchased Wisconsin ski-trip ticket in your wallet, you realize you've goofed: the two trips take place on the same weekend! And it's too late to sell either one. Which trip do you go on? More than half of test subjects said they would choose (more expensive) Michigan — even though they knew they would enjoy the Wisconsin option more. With the money for both trips already spent (and unrecoverable), this choice makes no sense; a person would get more utility (pleasure) out of the trip to Wisconsin for no further expense, but the human fear of "waste" convinces him or her to select the less pleasurable trip.* On a global scale, the same kind of dubious reasoning can have massive consequences. Even presidents have been known to stick to policies long after it's evident to everyone that those policies just aren't working.

Economists tell us that we should assess the value of a thing according to its expected utility, or how much pleasure it will bring,t buying only if the utility exceeds the asking price. But here again, human behavior diverges from economic rationality. If the first principle of how people determine value is that they do so in relative terms (as we saw in the previous section), the second is that people often have only the faintest idea of what something is truly worth.

Instead, we often rely on secondary criteria, such as how good a deal we think we're getting. Consider, for example, the question

* As a final illustration, borrowed from maverick economist Richard Thaler, imagine buying an expensive pair of shoes. You like them in the store, wear them a couple of times, and then, sadly, discover that they don't actually fit properly. What happens next? Based on his data, Thaler predicts the following: (1) The more you paid for the shoes, the more times you will try to wear them. (2) Eventually you stop wearing the shoes, but you do not throw them away. The more you paid for the shoes, the longer they will sit in the back of your closet before you dispose of them. (3) At some point, you throw the shoes away, regardless of what they cost, the payment having been fully "depreciated." As Thaler notes, wearing the shoes a few more times might be rational, but holding on to them makes little sense. (My wife, however, notes that your feet could shrink. Or, she adds brightly, "You never know, you might get some sort of foot surgery." Never give up on a nice pair of shoes!)