Sunken costs fallacy: Lessons from 277 Park Ave

Six or seven years ago, a friend of mine spent thousands of dollars to buy a few baseball cards of a young player he was sure would be a star. He financed the purchases with credit cards.

Chances are you’ve never heard of Keston Hiura, so you know this story is not going to turn out well.

As Hiura’s career foundered and my friend’s debts piled up, I listed the cards for him on my eBay account. Every so often, prospective buyers offered substantial sums, but far less than my friend had paid. He turned them all down, hoping against all odds that Hiura would yet blossom.

In June, a bid came in for a Hiura card my friend had bought for about $5,000. The offer was $74. I didn’t have the heart to tell him.

But then, although Hiura was approaching his 28th birthday and still toiling in the minor leagues, someone offered $310 for the same card. Yet my friend still said no.

Economists call this the sunken costs fallacy. A sunken cost is one that has already been incurred and cannot be recovered. The fallacy is the series of irrational decisions that follow, such as rejecting a $310 offer for a card that will soon be worth less than a drink coaster.

Which brings us to 277 Park Avenue, a Class A office building owned by the Stahl Organization.

Two years ago, the New York Post wrote that because Stahl is not self-promotional, “277 Park Avenue’s success has been hidden in plain sight.”

Apparently its success remains hidden, at least to lenders.

This year, the Stahl Organization couldn’t refinance it for anything close to the $1 billion it borrowed against the office tower in 2014, Crain’s reported.

Stahl’s refi closed this month at only $750 million, The Real Deal reported Monday, meaning the landlord had to kick in $250 million to pay off the expiring loan. And that was despite having spent $120 million on improvements and signing six tenants to leases totaling 270,000 square feet in 2022.

If Stahl had known that lenders in 2024 would value the building as poorly as they did, it might not have spent the $120 million. Yet here it was forking over $250 million — tripling down. According to the sunken cost fallacy, the previous investment made it more difficult to walk away. 

Stahl has now put at least $370 million into the building in the past few years, with no guarantee that the property, the Park Avenue corridor or the office sector in general will hold their value, let alone prosper, before the new loan matures in 2029.

At the highest levels of real estate, the mental challenge of not letting sunk costs interfere with decisions is well known to all participants. Stahl surely also is aware of the “endowment effect” — the tendency to value your assets more than you would if you didn’t own them.

But knowing these biases doesn’t necessarily make it easier to overcome them, as implicit bias training has shown. In this case, Stahl swallowed its bitter pill and soldiered on.

It might well pay off in the end. But would investors with no attachment to 277 Park Avenue trade places with the owner? No sooner than you would bid for a Keston Hiura rookie card.

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