The Sunk Cost Fallacy & Tanking

On the increased complexities of the play-in, flattened lottery odds, and the pursuit of avoiding a sunk cost

In economics, we often hear about the idea of a sunk cost. A sunk cost is a cost that has already occurred and cannot be recovered by any means. The idea behind identifying a sunk cost is to not let money spent, which can’t be changed or relitigated, impact future decision-making with relevant (or unspent) money.

Sunk costs can and do significantly influence decisions about the future. This is because it’s psychologically challenging to let go of previously invested time, effort, or money. That attention leads to what is known as The Sunk Cost Fallacy, or the motivation that individuals should work to recoup what they lost from the sunk cost more than simply making a decision without reference to that sunk cost.

For example, let’s say you buy a $15 movie ticket for a 3:30pm movie and, as you walk into the theater, your friends invite you out for drinks starting immediately. At 3:45pm, you realize the movie is a horrendous piece of shit and you don’t think you’ll like it. The sunk cost fallacy would impact your decision-making by influencing you to stay through the entire movie and miss going out with your friends because you already spent the $15. A poor decision in the past is preventing you from making a good decision with your time and money now.

The one clarification we need to make with sunk costs: they cannot be recuperated. No matter how loudly or soon into the movie you went up to the theater manager and demanded a refund, you wouldn’t get it. What’s done is done — those $15 are gone.

In the draft pick trading world, not every draft pick sent away is truly sunk. Nearly every deal these days has some sort of conditional attachment to it, where the pick conveys only based on the seeding and standings of the teams involved. Commonplace nowadays is putting on a “top three protection” on the pick, or saying the selection will only convey if it falls “outside the top 14.”

In the example we mentioned before at the movie theatre, the protections act like policies in the movie theater. If Regal Cinemas had a rule where you could get a full refund from your movie if you asked for it within the first 25 minutes of the film, the $15 spent would not become a sunk cost until 3:55pm. There’s a small protection in place for you to decide which afternoon activity is truly right for you.

What we’re seeing right now in the NBA is a bunch of franchises trying to figure out whether they should leave the theater. 9 of the 30 first-round picks in 2023 have some sort of conditional attachment to them on whether they’d convey to a different team. Most of those conditions are pretty clearly not going to be met — the Detroit Pistons pick is 1-18 protected, meaning if they finish with one of the eleven-best records in the league, the pick goes to the Knicks. The likelihood of that happening is akin to the odds of me getting my own stand-up special.

For several teams, the decision-making on chasing these picks is right in front of their faces.

• Chicago Bulls: pick is 1-4 protected, otherwise it goes to the Orlando Magic

• Portland Trail Blazers: pick is 1-14 protected, otherwise it goes to the Chicago Bulls

• Washington Wizards: pick is 1-14 protected, otherwise it goes to the New York Knicks

For the Blazers and Wizards, this decision is very much a case study in self-realization and asset valuation. There really isn’t a decision to make unless the teams feel, based on what is within their own control, they have to choose between making the playoffs and forfeiting the pick or keeping the pick and missing the postseason. The Wizards, currently 12-20 and four games behind the team sitting 15th and four games behind the worst record in the league, are equally close to both poles. They can prolong their decision until more information is available. So can the 17-15 Blazers in a loaded Western Conference.

Let’s revisit the movie theater analogy for a moment. Remember that policy on the refund? It’s more complicated than it seems.

The manager has a roulette wheel that all who want a refund must spin. The earlier they come into the lobby to get their refund, the greater their odds are of getting the $15 back. If they come into the lobby at 3:53, only minutes before the 25 minutes are up, their chances of getting their money back are slim to none. The roulette wheel also only is limited to ten spins per movie showing, meaning that if you aren’t within the first few to exit and request a refund, you won’t even get a chance at your money back.

Now, up in the back of the theater watching this subpar film, you’re starting to sweat bullets. You’re not just focused on whether you like the film and value going out with your friends, but on what time it is and how many other people are leaving. Every time someone else gets up from their seat (even if it’s just to go to the bathroom), you worry about losing the chance to get your money back. How do you decide when to leave the theater? How much of a chance do you give the movie to prove that it could be worth the $15 already spent on the ticket?

Those are the challenges the Chicago Bulls front office currently faces. The Bulls are 13-18, squarely in the middle of the lottery at Christmas. They’re talented with veterans like Zach LaVine, Nikola Vucevic, and DeMar DeRozan. Their best role player, Lonzo Ball, hasn’t suited up this season and there’s no timetable for him to return. Their 2023 first-round draft pick is top-four protected, otherwise, it transfers to the Orlando Magic as part of the deal that landed Vucevic in the Windy City.

The Lonzo injury looms large for the 13-18 Bulls

There are two acceptable outcomes for the Bulls organization: finish in the playoffs or net a top-four pick. Neither outcome is fully within their control. The threshold for a postseason series has changed with the play-in tournament. Does finishing with the 11th-worst record and losing one game in the play-in tournament do enough to justify sacrificing their pick to Orlando? Does qualifying through the play-in for the 8-seed and sending the 15th pick to Orlando make them feel like the trade was more worthwhile and miss the draft selection less?

Or should they bottom out, doing all they can to maximize the opportunity they land in the top four on draft night? Finishing with one of the four worst records in the NBA is no guarantee of keeping the pick; all teams with a bottom-three record only have a 52.1% chance to be in the top four on draft night. Tanking to the bottom only results in a coin flip, at best, that they keep the pick anyway.

The downsides of both strategies are apparent. Miss a best-of-seven series and never give yourself a chance at keeping the draft pick? The season appears lost and the Vucevic trade looks like a complete mess. Remove yourself from the chance of postseason competition and still lose the draft pick to Orlando on a coin flip? Now the pathway to future contention is pretty unclear and this season was written off rather early, likely resulting in other dominoes falling that make competing next year more challenging.

Growing up around a father who fancied himself an amateur economist, I heard this saying a lot as a kid: “let a sunk cost be a sunk cost.” To paraphrase, the turmoil that comes from trying to recuperate those prior decisions isn’t worth sacrificing the next opportunity for.

I think the same concept should be applied to the Bulls this year, even if the 2023 pick isn’t a totally sunk cost yet. By chasing the ghost of the failed Vucevic deal and letting the small chances that they recuperate the pick impact their decision-making this year, they aren’t making a clear decision about the future. Let the pick go! Don’t even think about it when trying to decide what should be done this season. Improve the roster, try to win games, and push toward the postseason without thinking twice. Let that trade be a sunk cost.

Front office work is difficult. Setting the course for the franchise requires a great deal of self-awareness, an accurate view of the playing field, shrewd evaluations of every player involved, and a ton of luck to keep all those pieces constant. But in this case, we feel very strongly that there is one wrong path to walk down. The 2023 draft pick for the Bulls is a mirage, a hologram of hope. To chase that hologram would be to turn their back on inspiring hope for the tangible assets they already hold.

It would be to buy into the sunk cost fallacy.