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Klaus comments on Sunk Cost Fallacy - Less Wrong
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It's easy to make up excuses for why it might still be rational to go to the movie. Here's how to factor all that out and cut to the real issue:
Scenario 1: You bought a $10 non-refundable ticket to a show. (And note that you definitely would not have done so if the show cost $20.) As you get to the theater you realize you lost your ticket. Luckily, they have more available, still at $10. Do you buy another ticket?
Scenario 2: You didn't buy a ticket ahead of time. As you get to the theater you realize that $10 has fallen out of your pocket and is lost. Luckily, you still have enough to buy a ticket. Do you do so?
Everyone agrees on Scenario 2. Of course you do. No one's on such a tight budget that an unexpected change in wealth of $10 changes their utility for theater.
But many people refuse (I've checked) to see that Scenario 1 is fully equivalent. They can't bear to pay another $10 for a show they already paid $10 for. If Scenarios 1 and 2 don't feel fully equivalent, you're probably suffering from the sunk cost fallacy!
Agreed! I only want to add the reference to Tversky and Kahneman's original study which you are talking about: The Framing of Decisions and the Psychology of Choice. The 10$ experiment is on page 457.
He talks about how this is called by creating different mental accounts. However, Kahneman writes in "Thinking, Fast and Slow" that it is more rational to only have one mental account for all incomes and expenses. In this case people wouldn't make the mistake of having savings in one account and credit card debt in the other.