I recently bought an annual ticket for every state museums in Berlin. It was an impulse purchase. While standing in line at the ticket office of Alte Nationalgalerie (Old National Gallery), I had to decide between paying 10 Euros for a single ticket or 100 Euros for visiting 17 state museums for one year. I chose the latter because I liked the idea of being able to visit museums “for free” regularly.
I doubt if my decision was the right one. The Old National Gallery was my only visit with the annual ticket so far. So maybe my decision won’t pay off (I’ll know in 11 months).
My purchase raises two questions. First, how to avoid impulse buying? Second, how to decide between a single ticket or a subscription? Here and today, it is about answering the second question.
From a theoretical perspective, the matter is not particularly complicated. It’s a decision made under uncertainties. The question is whether today’s additional expense (in my case, ten times as much) will pay off in hindsight.
This is the math:
Probability of visiting a museum
ticket price for a single visit
times visiting a museum
likely amount of money you will have to pay in the upcoming 12 months
If the outcome counts more than 100 euros, it would be worth buying an annual ticket.
(Actually, the result would still have to be discounted because you thrust out your money when buying an annual ticket. But we’ll skip that point to avoid complicating the reasoning. - More about the economic idea of the discount factor here.)
What is theoretically easy is practically difficult. I don’t know in advance how often I will go to the museum, nor what the probabilities are.
We constantly face decisions such as mine at the museum’s ticket office. Should I commit myself long-term (hoping to make a good bargain), or should I pay for each service? Shall I subscribe to a newspaper or pay for single issues? Shall I tie myself to a gym (hoping to go there permanently)? Shall I bind to a two-year mobile phone contract (and receive an iPhone at half price)?
The main thing with long-term commitment is, as said, that we don’t know if that commitment will pay off. You could say that’s life, so no problem. And that’s right. But there is another thing, a psychological trap, so to speak.
After I’d bought the annual ticket, the basis for deciding whether to visit a museum changed. A museum visit now costs no money (just time). Economically speaking, a visit is worthwhile from a value of more than 0 euros. As a result, I will tend to go to the museum more often than if I had to pay extra for each visit. That’s not a problem yet. But it becomes problematic if I want to “get the most out” of the annual amount I’ve paid.
Why is that?
One of the most important things you can learn in economics is the sunk costs fallacy.
Professors of economics and business administration admonish their students to ignore costs that have already been incurred – i.e. sunk – in making decisions. They urge their students to act as rational decision-makers. Their choices should only depend on future or prospective costs. “Don’t cry over spilt milk” or “don’t throw good money after bad” are other ways of saying: “ignore sunk costs”.
But it is hard to think that way. There is scientific evidence that people demonstrate a greater tendency to continue an endeavour once an investment in money, effort or time has been made. That’s because we don’t like to admit mistakes. We hope that if we invest heavily a second time, we can turn the tide. To be right in the end. And so we often lose a second time.
Here is an ordinary example. You’ve already bought a concert ticket for 100 euros a week before but on the day of the concert you feel sick and it’s raining outside. Although the current drawbacks outweigh the benefits, you are still likely to choose to go to the show. Because of the sunk costs fallacy. You wouldn’t go to the concert for free, but you go because you’ve already paid for it.
Because of this psychological trap, many people have lost fortunes in the stock market. And this trap is one reason why we spend so many evenings watching series. We want to get as much as possible from our Netflix subscription (the even worse thing here is that we usually don’t even have a choice to buy only one film since there are mainly subscription models with Netflix and others).
What does the sunk cost fallacy mean in my case, for the next time I‘ll think about visiting a state museum? Of course it’s OK to remember that since I have an annual pass admission is free. It becomes problematic when I go to the museum so that my annual subscription pays off. That I go to the museum, not because I want to go to the museum, but because I want to get as much as possible out of the annual subscription.
It’s obviously not easy to make the right decision when you have an annual ticket or a subscription. In case of doubt, this speaks for buying single tickets, i.e. paying for each service provided. Even if it is often suggested otherwise. For reasons. Because the advantages of long-term commitments are usually with the suppliers in the form of early and all-at-once payments by the customers and with them being tied to a single supplier for a while.
As in my case. I will probably visit any private museums in Berlin during the coming months.