The Victorian government shows they can avoid the sunk cost fallacy

You may have seen the news last week. The Victorian state government in Australia has cancelled the 2026 Commonwealth Games. As Jack Anderson (University of Melbourne) wrote in The Conversation:

The cancellation of the 2026 Commonwealth Games by Victorian Premier Daniel Andrews took all stakeholders – Commonwealth Games officials, athletes, sports bodies and local government officials – by surprise.

The Andrews administration will likely deal with the political fallout from not honouring its contract to host the games, but there may be legal and reputational damage ahead.

The decision was a surprise, but not for the reason many people think. Once a government has decided to hold a big event, they will usually be loath to change their mind. Behavioural economics suggests that quasi-rational decision-makers are susceptible to the sunk cost fallacy. Sunk costs are costs that have already occurred and that cannot be recovered, like the millions the Victorian government has already spent on the Commonwealth Games. Sunk costs should not affect decisions because, regardless of what the decision-maker chooses to do, those sunk costs have already been incurred. Any money that the government has already spent on the Games has already been spent, and will have been spent regardless of whether or not the Commonwealth Games goes ahead. So, at this point, the government should make the decision about whether to go ahead with the Games should be made on the basis of costs and benefits that are to come. Essentially, the Victorian government weighed up the billions of dollars they would face in the future against the benefits from hosting the Games. The costs must have outweighed the benefits.

The sunk cost fallacy typically occurs because of mental accounting, which suggests that we keep 'mental accounts' associated with different activities. We put all of the costs and benefits associated with the activity into that mental account, and when we stop that activity, we close the mental account associated with it. At that point, if the mental account has more costs in it than benefits, it counts as a loss. And because we are loss averse, we try to avoid closing the account. If the Victorian government were affected by mental accounting, they may have still gone ahead with the Games, trying their hardest to avoid banking a loss on the Games. Mental accounting is responsible for keeping us in unpromising projects for too long, as well as unhappy relationships, and bad jobs.

So, the Victorian government were not affected by mental accounting (just like Warner Bros, when they cancelled the release of the Batgirl movie). Even the prospect of bad publicity (of which there has been plenty, and which must have been anticipated) was not enough to dissuade them from the cancellation.