Subscription Creep and the Sunk Cost Fallacy

One of the most common financial fallacies is the sunk cost fallacy, which tricks people into sticking with a poor decision due to a mistaken belief that they should continue to do so due to the significant amount of resources already invested.  For it to be a sunk cost, the investment is entirely unrecoverable.  On a personal level, this often involves that most fleeting resource: time.  Many people stick with an unproductive, or even harmful, decision because they have spent so much time on that path already.  

Why Are We Susceptible to the Sunk Cost Fallacy?

In behavioral economics, researchers study the psychological influences of economic and financial decision-making.  They have discovered that a significant portion of adults are susceptible to the sunk cost fallacy, with almost a quarter of test subjects preferring to stick with an inferior asset that they had worked to achieve instead of opting for a higher-value asset.  Different traits make people more or less susceptible to overvaluing sunk costs, ranging from risk tolerance to tendencies to nostalgize and/or form emotional attachments.

Fear of Admitting Failure

One prominent reason that people fall prey to the sunk cost fallacy is a fear of admitting failure.  Even though their current decision is clearly bad, economically speaking, they place greater utility (satisfaction) in appearing [somewhat] correct than in not taking economic losses.  Political scientists study similar phenomena with voters, exploring how voters can continue to support candidates who have clearly abandoned principles and promises on which they campaigned.  In politics, many voters have a morally flexible attitude toward politicians they support, allowing them to overlook or accept certain “deficits”.

When it comes to economics and finance, a similar effect may occur in terms of individuals accepting certain levels of economic loss.  If the original plan was your idea or belief, you will continue to support it even if it is unprofitable (to some extent).  You may consciously or subconsciously refuse to acknowledge the severity of the sunk costs.  This may be compounded by social desirability bias, which can affect economic decisions.  If an individual made an economic decision that was both publicized and considered socially desirable, such as assisting with a “noble” cause, he or she may overlook tremendous sunk costs that reveal the decision to be harmful.

Sticking With Unused Subscriptions Due to the Sunk Cost Fallacy

Consumers may find themselves paying every month for unused subscriptions due to an unwillingness to cancel those services, which may be the result of the sunk cost fallacy.  Having spent so much money on the subscriptions already, perhaps for many years, these consumers may feel obligated to continue them despite their lack of value.  Despite not using the subscriptions, they may fear a sense of loss from canceling them.  This loss could encompass many things, ranging from nostalgia to unlikely ambitions of finding a future use for the subscription.

Sunk Cost Fallacy Compounded by Wishful Thinking

Although some consumers may understand the sunk cost fallacy and know, intellectually, that it makes no sense to maintain unused subscriptions, their minds may work hard to rationalize current reasons to maintain them.  Useless subscriptions may be seen as investments in redundancy, providing consumers with backup options for services they actually use.  For example, many families may continue to pay for unused streaming entertainment services based on the misguided belief that something might occur to make their preferred streaming options inaccessible.  

If Netflix suddenly goes down, it’s good to have Disney+ as a backup, right?  However, the chance of Netflix suddenly going dark while the normally unwatched Disney+ remains ready is very small, not covering the tens of dollars per month in a rational sense.  However, some consumers may place such utility in maintaining multiple backups for every service that the cost is worth it, especially for those with high incomes.  After all, if you’re making good money, why not purchase access to the entire realm of subscription services, just in case?

Auto-Renewal Makes it Easy to Ignore Unused Services

One commonly-used tool by subscription services makes it easy to ignore the fact that we overspend on unused digital tools: auto-renewal.  If we had to go in each year and choose to manually renew our subscriptions, many of us would break free from the sunk cost fallacy by seeing the new costs to be accrued.  However, many subscription services are set up to automatically re-subscribe us for another year unless we actively cancel, which is often difficult.  

Many consumers who plan to cancel their services may be lured into a false sense of security by the annual nature of the subscriptions, rationalizing that they have months until they need to take action.  This, of course, leads to them forgetting to cancel and suddenly discovering that they have been re-enrolled for another twelve months of payments.  Now there is yet another year of having the subscription, reinforcing the sunk cost fallacy and influencing the consumers to feel that, since they have had the service for so long, they should continue it.

Forgotten Services Lead to Loss of Welfare and Consumer Surplus

Consumers only benefit from services they know they possess, and thus the sunk cost fallacy leads to lots of welfare loss in economics.  How many millions, or even billions, or dollars are being spent per month with no conscious utility generated?  One self-reported survey indicates that a slight majority of all consumers have at least one subscription service they do not use.  This loss of consumer surplus, which occurs because consumers are paying a fixed value but realize zero utility, creates a misallocation of resources for society.

However, forgotten subscriptions are not a total loss to society - the producers get paid the monthly revenue and use this money to purchase factors of production (including labor) and make investments.  Ultimately, our collective wasteful spending, encouraged by the sunk cost fallacy, supports many jobs and some degree of technological research-and-development by these tech companies.  This leads to some degree of societal advancement, thanks to firms’ abilities to invest in new capital goods and innovations.  Therefore, even if you cannot bring yourself to cancel your old HBO Max subscription, it’s not a total loss for society.