The question to be asked here is, “How can playing in pain improve Saxena’s lot? Well, if she stops playing she has to recognise the fact that all the money that went towards paying for the membership of the club is a sunk cost. And recognising this is a bigger pain than the pain she felt in her arm, every time she played tennis.

The sunk-cost effect can be observed in other aspects of life as well. My father bought a second hand Ambassador car, and over the years, he spent a lot of money repairing it. In fact, he could have bought a new car for much less the money he spent on repairing the car.

The sunk-cost effect works even in the stockmarkets. In his book, Stocks to Riches, Insights on Investor Behaviour, Parag Parikh points out: “Generally, when investors go wrong in their purchase decision of a stock, they buy more at every fall. They believe that this will bring down the cost of their purchase. There is nothing wrong in that, provided they are confident that the stock has a great value. But if they buy only to justify past actions, then they are prone to sunk-cost fallacy”.

Ketan Parekh’s favourite stocks became famous as K-10 stocks. Parekh rigged these stocks to their all-time highs and sold out. A lot of investors who had bought these stocks have held on over the years and even bought more, to bring down the cost of their purchase, nursing the hope that someday the price of these stocks will rise again. An individual can use the sunk-cost effect to his advantage as well. John Gourville and Dilip Soman in their research paper, Pricing and the Psychology of Consumption, published in the Harvard Business Review in September 2002, analysed the data on the payment as well as the attendance record of 200 members of a health club in Colorado, US.

All the members had to pay annual fees of $600 to use the facilities that the club offered. The members had the option to pay annually, semi-annually, quarterly or monthly. Gourville and Soman came up with a very interesting finding. Members who made an annual payment used the facilities of the club most frequently in the months that came immediately after the payment had been made. Towards the end of their membership period, they treated their membership as almost free and worked out at a rate which was about one-fourth of what it had been in the initial months. A similar pattern was observed with members who paid quarterly and semi-annually as well. The usage of the facilities was the highest immediately after the payment had been made. In contrast to this, the usage pattern of members who had opted for the monthly payment option was the most smooth.

The reasoning being that they were reminded of the sunk-cost of their membership fees every month. Hence people who want to ensure that they keep going back to their gym regularly should opt for a monthly payment option. As Gourville and Soman point out in their paper, “Our research suggests that consumption is driven not so much by the actual cost of a paid-for product as its perceived cost”.