Mental Accounts and Sunk Costs

This flow traces how people organize outcomes into emotional accounts and then protect those accounts at the expense of future value.

increasingBearing stren­gth in each eventdecreasing

Ticket in the Blizzard

Paid Tickets The Red Balance A fan who paid for a basketball ticket is more likely to drive through a blizzard. Sunk Emotion The rational irrelevance of the purchase price loses to the desire to avoid a negative account.

Disposition Effect

Winners Sold First Personal Score Investors enjoy closing accounts with gains and avoid admitting losses. Wealth Cost They sell promising winners while retaining weaker losers.

Project Escalation

Good Money After Bad Corporate Failure A company continues funding an underperforming project because prior spending feels like an account that must be recovered. Agency Conflict Managers protect their reputations with shareholders' resources.

The Tennis Club

Dead Loss Avoided Painful Membership A player continues using a club after developing tennis elbow. Emotional Accounting Playing in pain preserves the fee as a cost rather than admitting it is lost.

Broad Portfolio Thinking

Future Consequences Beyond Purchase Price A rational investor evaluates which asset will perform best from now onward. Account Closure Past costs matter emotionally but should not determine future allocation.

During the mental-account discussion

Later in Part 4

After the disposition discussion

Near the end of the mental-account chapter

Near the conclusion of Part 4