A True Story
My brothers and sister used to call me Charlie Brown because of my epic bad luck. Well before the horrible accident which I touched upon briefly in Unintentional Meander Up Grumpus Ave Part 1, the family knew the only law which applied to me was Murphy’s. Mostly this played out in harmless ways, such as all my toys breaking. If there was one kid in the family whose Christmas toy broke on Christmas Day, it was me. Birthdays too. The phenomenon didn’t stop at the end of adolescence either. In fact, Mrs. Grumpus often mutters that if she’d only known about this “Charlie Brown thing” prior to our marriage, she would’ve re-examined her options.
All joking aside, the “Charlie Brown thing” really cheeses Mrs. Grumpus off because it makes my purchase decisions more complex than they need to be. It also turned me into a cheapskate. In my mind, what’s the use of buying something nice if it’s just going to break? On the plus side, I’m not materialistic. Since material items break easily in my world, I don’t get attached to stuff.
I do find value in the few things which outlast my Charlie Brown bad luck. All of my surfboard purchases over the years fall into this latter category. The two I still own hold a far more significant value to me than what they are probably worth dollar wise. The same holds true for my sea kayak, although I am currently separated from it geographically. Sigh. Living in Hawaii without my sea kayak. Great planning on my part.
That said, I’d be lying if I told you I didn’t hate my Charlie Brown bad luck. While at some point in my life I resigned myself to it, it still chafes. That isn’t to say “woe is me, my life sucks”. It doesn’t. Yet, just once I’d like to buy a highly rated item off of Amazon, Google, or Consumer Reports and have it function as designed for a normal length of time. Especially something I need such as a power tool or a hand vacuum. I’m not talking about anything frivolous. Is that too much to ask for? Apparently so. Thus, it shouldn’t shock anyone that I recently felt compelled to purchase a new(ish) electric bike, after one too many things broke on my old one — which was only about six months old.
To be fair, I did most … er… all the damage to the previous e-bike by riding it way too hard. As a result, I trashed the original tires and brakes riding the bike like it was something more than just a mountain bike that someone slapped an electric motor on. I burnt out a motor trying to haul my kids up a hill in a pull along kiddie cart. I also tore up the electrical wiring and bent a derailleur in a fairly big crash on the way home from work one day. A crash which resulted in a small visit to the Emergency Room. The crash also compromised the battery, which proved the coup de grâce for the old bike.
In the six short months that I owned the first bike, I probably sunk about 80% to 90% over and above the original purchase price in repairs. Part of the reason for that is that I’m not handy with the tools. I can barely replace bike tubes, tires, and brake pads on my own; although that is more than what I could do before I bought the bike. The original bike I purchased was also cheap for an e-bike (sub $800 even with Hawaii delivery charges). As it turns out, cheapness was also part of the problem. Come to find out in the world of e-bikes you get exactly what you pay for; especially if you plan to ride your bike a serious amount.
That’s exactly what I did too — rode it a lot. When it was working, I commuted to and from work five days a week on it. My commute is a 12-mile round-trip journey capped with an 800ft hill climb at the end of it. Hawaii is mountainous yo! Had I bothered to consult anyone with authoritative e-bike knowledge (like someone who runs an e-bike blog perhaps?), I would’ve known this was too much to ask of a bike at that price range. However, anyone’s who’s read my Unintentional Meander series knows that I love to learn money lessons the hard way. As I did with my first and only home purchase, so too with my first e-bike purchase. What can I say? I learn by doing stupid things so you don’t have to. Call it a public service.
In any case, I cut bait on the old bike, sold it for $200, ate the loss, and decided to buy a proper e-bike instead. The one thing I discovered during all the trials and tribulations of owning the first e-bike, was how much I valued riding to and from work. I enjoyed the exercise, especially since I don’t get much time during the workday for regular work-outs. I also enjoyed starting and ending my day outdoors, not to mention the warm and fuzzy feeling from limiting my carbon footprint. And of course, I REALLY enjoyed skipping the commuter traffic — which sucks on Oahu.
However, I spent a lot more on the new(ish) bike even though it’s “previously owned”. It cushioned the blow (somewhat) to know that the experience of owning the first bike led me to spot the excellent deal that was the second. That includes snagging the new(ish) bike with seven months of warranty time remaining and letting the previous owner take a $600 depreciation hit (much like a used car). As a result, I don’t feel as bad about my previous e-bike decision, or my current decision to double down on a more expensive model. Still, for a guy like me who was conditioned from early childhood to expect his toys to break, and hates spending money on things he doesn’t expect to last, both bike decisions hurt.
This fiscally painful sojourn into the realm of e-bike ownership left me wondering exactly how my lifetime of Charlie Brown-esque bad luck affects my perception of sunk costs and the sunk cost fallacy. For those of you unfamiliar with sunk costs, Wikipedia defines it thus:
Since sunk costs are past costs, and by their nature are unrecoverable, in rational economic terms they shouldn’t play into future economic decisions. For example, let’s say I take Grumpus Minimi #1 (pronounced min-EE-my) to see “Star Wars: The Last Jedi”, we buy our tickets and stand in line. Just as I go to hand our tickets to the usher, I realize I lost the tickets. That’s $20 dollars gone, never to be seen again. What should I do?
An economist would say rationally I should pay another $20 for two more tickets presuming the perceived value of the future experience remains unchanged. If I previously valued seeing the wonder of Star Wars light up in Minimi’s eyes at $20 dollars and nothing changed about the situation (i.e. there are still $20 seats available), then logically I should spend another $20 for the experience.
Of course, the human brain doesn’t work that way, does it? No, it doesn’t. And I don’t mean I opine the human brain doesn’t work that way. I meant a lot of people way smarter than me, including Nobel prize winners, have demonstrated repeatedly that the human brain is wired to avoid loss. This negatively impacts how humans think about sunk costs. The brain’s aversion to loss means people routinely bring the emotional baggage from previous money decisions into consideration when making their current money decisions, even if sunk costs logically dictate the two decisions are unconnected.
This typically plays out in one of two ways. As Dave McRaney points out in his great article on the Sunk Cost Fallacy at the blog “You Are Not So Smart“, the grandfathers of behavioral economics, Daniel Kahneman and Amos Tversky, ran a similar thought experiment as mine in a clinical setting to demonstrate the first way:
Now, imagine you go to see the movie and pay $10 for a ticket, but right before you hand it over to get inside you realize you’ve lost it. Would you go back and buy another ticket? Maybe, but it would hurt a lot more. In the experiment, 54 percent of people said they would not.
To better understand this, let’s follow my thought experiment to its inevitable conclusion. Despite the availability of $20 seats, Father of the Year Grumpus Maximus doesn’t spend $20 to buy two more tickets. He views it as spending $20 more, for a total of $40, on tickets. Despite the irrecoverable nature of the $20 spent on the lost tickets, Grumpus Maximus emotionally, but erroneously, adds it to the equation when considering if he should spend $20 again. Instead of making another $20 decision, Grumpus Maximus irrationally turns it into a $40 decision. Thus, instead of filling Grumpus Minimi’s eyes with Star Wars wonder, Grumpus Maximus fills them with tears. Dejected, they walk home from the movie theater (since the e-bike is broken … again).
Quick segue: I have no idea why I referred to myself in the third person in the previous paragraph. Maybe to distance myself from a mistake I know I would make if faced with the situation “for reals”. Thankfully the above story is hypothetical, so please refrain from sending me Father of the Year nominations.
The second way the human brain short circuits people’s understanding of sunk costs is through a process often referred to as the Concorde Fallacy. In this case, the emotional baggage people carry from previous money decisions keep them invested in a situation long after they should have declared it a lost cause and walked away. Again Dave McRaney:
The sunk cost fallacy is sometimes called the Concorde fallacy when describing it as an escalation of commitment. It is a reference to the construction of the first commercial supersonic airliner. The project was predicted to be a failure early on; but everyone involved kept going. Their shared investment built a hefty psychological burden which outweighed their better judgments. After losing an incredible amount of money, effort and time, they didn’t want to just give up.
The brain’s preference for loss aversion prevents people from stepping back, logically analyzing a situation for what it is, declaring it a lost cause, and moving on. Doing so would require accepting the loss and admitting that all previous efforts were sunk costs (i.e. irrecoverable). We see this effect play out in people’s everyday lives. From refusing to end a toxic relationship to an inability to hold a garage sale; each situation requires an admission that the emotions, money, or time previously invested are gone, never to return.
Time for one of my favorite questions. What did we just learn? My aversion to spending money relates to more than just the Charlie Brown Effect. The fact the human brain is wired to avoid loss also plays a role. To me, spending money equals loss, and since humans are wired to avoid loss, I’m wired to avoid spending money. With that insight, how should this new understanding of the Sunk Cost Fallacy affect my feeling towards my e-bike purchases specifically? Well, assuming I understand the fallacy part correctly, I shouldn’t feel nearly as bad about my bike purchases as I currently do.
Why? Well, given the facts and the unknowns at the time of my first e-bike purchase, I probably made a logical decision to go cheap initially. In other words, I had no idea if I would enjoy the e-bike and while I really hated that 800ft hill, I didn’t know if an e-bike was truly the answer. I also had a reasonable expectation that any bike I bought would break due to my Charlie Brown luck. Thus, with no real mechanism to properly value the experience of riding an e-bike up that hill against the likelihood of breakage, low balling the first bike was logical in hindsight.
Shelling out money for the initial repairs also seems logical in hindsight. By the point I burnt out my first motor, I had accumulated several months of positive feedback from my initial use of the bike for my commute. I enjoyed it so much that I hated the odd days I was forced to drive instead. I also had validation of my expectation that my bike would break early in its life (we can argue later in the comments section whether my actions made that a self-fulfilling prophecy).
By setting aside the initial cost of the bike as a sunk cost, the decision to engage in somewhat expensive repairs was logical. The bike provided me value, but I needed to temper this value with the expectation the bike would break again. This logic continued to hold true for the second round of repairs after my crash. Yet, the margin by which the bike provided a useful service vs. the likelihood of continued breakage, had diminished significantly.
By the time the battery broke, paying for more repairs on my first e-bike was no longer logical. The data about breakages due to the cheapness of the bike was overwhelming. I didn’t have the right tool for the job. I’d be throwing good money after bad if I continued to pay for repairs, so I cut bait. By doing so I unintentionally avoided the Concorde fallacy.
Yet, I still valued the experience of commuting on an e-bike. In fact, an economist might argue I now had an ability to value the experience of using an e-bike far more accurately than prior to my first purchase. Since I had six months of previous e-bike experience and ownership to base my second purchase on, I could justify the increased cost I paid for the second, better, bike.
Grumpus The Economist
To put this into numbers, the original ~$800 purchase price, plus the ~$700 worth of repairs, from my first bike were the sunk costs. That’s roughly $1500, but since I sold the first e-bike for $200, let’s call it approximately $1300. Don’t worry I told the buyer about the compromised battery. I’m cheap but not a jerk.
Back to the numbers, the second e-bike cost $1600. I know, I know. That’s a lot of money for a bike, and not overly frugal of me. If it makes you feel any better, I agree. However, the original owner paid $2240 for it, so hopefully, you can see I got a deal. Remember I’m paying Hawaii prices out here too.
So are we good? Thanks, I appreciate it.
In any case, my point is that I viewed it, and continue to view it, as a $1600 purchase and not a $2900 purchase. You see what I’m doing there? Falling prey to the Sunk Cost Fallacy would mean I viewed the second purchase as a continuation of the first purchase, plus the cost of repairs. Roughly $2900 in all. Honestly, if I chose to view it that way, I would still be mentally flogging myself for not purchasing a kick-ass top of the line $3000 bike, to begin with. Think of the stress!
I’m not doing that though. No, Grumpus The Economist, who now understands the difference between sunk costs and Sunk Cost Fallacy, doesn’t view his second e-bike purchase this way. He views the previous expenses as sunk costs and unconnected with the purchase of the second bike. Thus, the second e-bike is a $1600 purchase, which is good value for money in his mind. Exercise, outdoors, low-carbon footprint, and avoiding traffic. That doesn’t even take into account the wear and tear he’s saving on his car, or the gas money he’s not spending.
There I go with the third person again. I need to get a grip. I’m obviously typing this late at night.
Where were we? Ah yes, previous expenses, sunk costs, $1600, and good value for money. Now, that’s all predicated on the hope that my Charlie Brown luck ran its course with my first e-bike. I don’t know if that’s truly the case. I’ve done what I can from a material perspective to limit the likelihood by upgrading the quality of bike I’m riding. From a use perspective, I’ve pledged to take it easier when riding in hopes of avoiding major crashes and to limit everyday wear and tear. I’ve also promised to take even better care of the bike than I did my previous one.
I am hoping the second e-bike achieves the same status of my surfboards and sea kayak. Now, if all of that goes for naught, and I find myself back at the cut bait point in six months time with this second bike, then I will step back and judge whether this is a Concorde Fallacy situation. If so, I will probably hang up my e-bike commuting career for good.
My final thoughts turn back to the Charlie Brown effect. I wonder if my experiences with the effect make me more predisposed to the Sunk Cost Fallacy, or less? On one hand, my genetic dislike of spending money probably means I’m more susceptible to the fallacy because I struggle to emotionally separate one purchase from another. On the other hand, a lifetime of disappointment in which my material purchases routinely break, may allow me to walk away easier than most from a Concorde Fallacy situation. In the end, it probably doesn’t matter. My awareness of, and sensitivity to, sunk costs and the Sunk Cost Fallacy has irrecoverably changed (for the better) by writing this article about my e-bike blues. I hope you feel the same way after reading it.