Today, I flew from Monterey to LAX on United, then on to Washington Dulles, with a connection planned to Dayton, Ohio. My plan was to rent a car in Dayton and drive to my hotel in Richmond, Indiana, and then go to a late dinner with some of the faculty at Indiana University East. I speak tomorrow afternoon at Indiana University East.
One problem: when I got to Dulles, I found out that my flight to Dayton had been cancelled. There wasn’t another flight to Dayton until the morning and this involved a connection in Newark.
I asked the customer service rep if she could get me on another airline. My little upset: I’m pretty sure that if I hadn’t asked her, she wouldn’t have mentioned it. But she worked the problem and came up with an alternate: take a Super Shuttle to Washington Reagan airport (DCA) and take American Airlines late this evening to Dayton. Done. So I’m sitting here in Washington Reagan waiting until I get hungry for a Five Guys hamburger.
There are two economic components to this experience.
1. Sunk costs.
I could have got all pissy and woe-is-me about the cancelled flight, but what’s the point? Then I would have paid for it twice: by missing a meal I had been looking forward to with some faculty and by having a fit. The loss due to the cancelled flight is a sunk cost.
When I have taught sunk cost in the past, I would sometimes remind my students of the expression “Don’t Cry Over Spilt Milk.” Then I would say that that wasn’t quite the right expression. Maybe you need to cry, but recognize that it’s spilt and that you can’t get it back.
Now I think it’s an apt expression. The crying over the missed flight would, as noted above, have added to the cost.
2. Compensating Differentials
Because the flight was cancelled due to a mechanical problem, United was responsible for making amends. The customer service rep gave me a $29 voucher to cover the Super Shuttle to Reagan, a $10 voucher for a meal either at Dulles or Reagan, and a ticket on American to Dayton.
It occurred to me that some people might scoff at the $10 voucher. But not me. I’m an economist. I recognize that $10 doesn’t cover a really nice meal. But think through what would happen if United’s policy changed to where they give you a $20 voucher. That extra money has to come from somewhere. Where does it come from?
Here’s where compensating differentials enter. The new equilibrium would be for United to charge a very slight amount more for tickets. I would rather pay slightly less each for a whole bunch of tickets and face the small probability that sometimes it means that instead of having a nice dinner with a glass of wine, get a Five Guys burger. (Truth be told, I’m actually looking forward to a Five Guys burger.)
READER COMMENTS
Jon Murphy
Apr 17 2018 at 8:21pm
I had a similar experience in November. I was flying Tampa to DC by way of Detroit. We were delayed leaving Tampa because of weather in Detroit and when we arrived in Detroit, I had just a few minutes to get my connecting flight. Long story short, I missed it by mere seconds (they had just shut the door and once shut it cannot be reopened). I felt my temper rising but reigned myself in by remembering that the cost is sunk (yes, I’d not be able to sleep in my bed, I’d have less time to work on my midterm, and I’d have to pay the cat sitter another day), so I decided to take advantage of the situation and enjoy my impromptu vacation (this is also how I discovered my Boston accent comes out when I’m angry and I have a slight Southern accent when I’m being polite).
The concept of sunk costs can be incredibly calming.
john hare
Apr 17 2018 at 8:35pm
This sounds like my experience with concrete and other supply delivery. Many contractors lean on dispatch to attempt to make them deliver at will. “I’ve got six guys standing around waiting on your truck, do you know how much business I give you?, and on to profane threats. I have had much better results working the problem with dispatch.
:Concrete is scheduled for 11:00, “hello dispatch, do we have time to grab a hamburger before the truck gets here?” “Take your time as we have a truck down and will be a bit late. I’ll call when he’s loaded”. Dispatch can’t create a truck they don’t have, and giving them an out normally gets a far more accurate ETA than when they are telling you what you want to hear so they can get to the other 3 lines on the board.
Steve Horwitz
Apr 17 2018 at 8:42pm
I want to write a column one day called “The Deadweight Loss of Anger at Sunk Costs.”
Getting angry over irreversible things is counter-productive, even if justified. Can’t change it, so turn around, look forward and decide what to do next.
It took me a day or two after my cancer diagnosis to really get this. I still have moments where I want to be very, very angry. And I think it’s justified.
But what good does it do? My energy is better spent on what I can actually control going forward.
Steve Y.
Apr 17 2018 at 9:21pm
You have attempted to distract us with $10 meal vouchers and $29 travel vouchers, but we are not fooled. If dollars and cents really mattered, you would have noted that the SFO to IND fare was less than half that of flying from MRY to DAY. (Richmond is about halfway between Indianapolis and Dayton.) You would have persuaded your wonderful spouse to drive from Monterey to San Francisco (90 minutes?) and treat herself to an evening with a few of her Bay Area friends.
And, not only is the UAL SFO-IND flight cheaper, it’s also non-stop, thereby avoiding the hassle and risks of transfers in Los Angeles and Dulles.
You are a highly intelligent economist and a knowledgeable resident of Monterey County. The real puzzle does not concern sunk costs or compensating differentials but why you selected this itinerary that gave rise to the problem in the first place!
Alan Goldhammer
Apr 18 2018 at 7:57am
I’m with Steve Y on this one. You also could have flown non-stop from LAX to IND if you wanted to keep that part of the leg. The difficulty with spoke and hub model is the more stop overs one has in the itinerary the increased probability of a problem occurring. The ‘old’ Keep it Simple Stupid (KISS) concept applies to air travel.
My own anecdote goes back to 1983 when we were returning to DC from a visit with my parents in San Diego. We flew back on Easter Sunday on a brand new (at the time) Boeing 757 with a single stop in DEN on the way to IAD. We were diverted to Salt Lake City after reaching Denver and finding that a tank car of some hazardous material had overturned near the airport which was now closed until the accident could be contained. We were at the Salt Lake City airport for seven hours with our 10 month old daughter and only access to what we brought on the plane. UAL staff could not tell us what was happening or when we would depart. Those who only had carry ons could try to book an alternative flight out.
We got to Denver at about 10 PM and were told we would have to stay in the airport overnight. At that time there was a midnight curfew on flights into IAD. After a lot of yelling at UAL staff, they finally gave us hotel vouchers and we were told we would be flying out standby the next morning as all flights were fully booked. We were saved by an April snow storm so all the skiers could not make it down for Monday morning flights and we were on the first flight out back to DC.
Dylan
Apr 18 2018 at 8:28am
My temperament I think is largely similar to yours, and I’m generally good at not getting upset at customer representatives that ultimately don’t have control over the situation. However, I do think it is important to recognize a real sunk cost from one that just looks that way. Your canceled flight was certainly sunk cost, but as you found out that didn’t mean that you didn’t have options to still get to your destination. In general nice and understanding will probably get you closer to that next best alternative…but there are cases where well directed targeted anger works better. I’m not good at that, I hate conflict, but I’ve seen it get results that I thought would in no way be possible. Lots of times I don’t really like that, because it feels the person who gets angry and makes a show is getting something they don’t really deserve. But I’ve also seen the other side where a company has screwed up big time but seems unwilling to do anything about it until anger and threats to get the lawyers involved.
On the missing connecting flight side of things, I’ve had good luck over the last year by having a credit card that offers trip delay insurance. I’ve had one flight delayed due to weather which caused me to miss my connecting flight, and no other flights until the next day. And another flight that was cancelled completely because of a storm. Both of these left me stranded overnight in a city away from home, but because of the credit card insurance I was able to book a room in a nice hotel and have a good dinner and breakfast, and not have to worry too much about the cost.
(In general I’m not too happy with the way the poor subsidize the rest of us with credit cards, but my abstaining from the market didn’t seem to be leading to the imminent downfall of American Express…so I gave in)
Jon Murphy
Apr 18 2018 at 8:31am
@Steve Y & Alan Goldhammer:
Another economics principle comes into play here: value is subjective.
Without good cause, we cannot speculate that Prof. Henderson made the “wrong” decision or is trying to “fool” us because we don’t know all the constraints that faced him in this choice (perhaps his wife couldn’t take 3 hours out of her day to go to SFO. Perhaps there were no seats on the flight that was most desirable. Perhaps the monetary price was higher. Lots of “perhaps.” Without knowing the answer to each and every one of them, you cannot speculate on whether or not this was the “right” decision). The knowledge problem is real.
The revealed preference is that the flight chosen, even with its risk, was preferred to all other known options; in technical terms, this flight had the lowest opportunity cost.
Hazel Meade
Apr 18 2018 at 1:41pm
Or he might have just neglected to search on other nearby airports. Some of us are better at using Expedia than others.
michael pettengill
Apr 18 2018 at 3:45pm
Having lived in Richmond for a decade, I know it’s an easy, short, for the Midwest, trip to the Dayton airport, 44 miles, and a hard long trip to the Indy airport, 84 miles, with typically heavy traffic going around Indy.
In fact, I was surprised it was 44 miles as we typically allowed 30 minutes on the highway circa 1970. We would typically do an hour to drop off or pickup someone, spending sometimes half an hour entertaining ourselves in the terminal and gate area, which were pretty much one big, empty, space. Students flying “standby” were on the flights in the evening, or mid weekend.
David R Henderson
Apr 18 2018 at 9:49pm
@Jon Murphy,
You nailed it. Thanks for answering.
I know a lot more about my constraints and preferences (mainly the former in this case) than the two other commenters do. They are subject to the fatal conceit.
Steve Schow
Apr 23 2018 at 6:46pm
As a side note – I don’t know David’s level of status, if any, on United – but paying a higher price per ticket for someone like United over Southwest can be worth it for situations like these. Any time I have a potential cancellation or travel hiccup I call a number and the nice lady on the other end gets me the best possible outcome, usually for no charge.
Steve Schow
Apr 24 2018 at 2:42pm
As a side note – I don’t know David’s level of status, if any, on United – but paying a higher price per ticket for someone like United over Southwest can be worth it for situations like these. Any time I have a potential cancellation or travel hiccup I call a number and the nice lady on the other end gets me the best possible outcome, usually for no charge.
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