Question

Sunk cost have been implicated in irrational decisions across multiple contexts. In the context of a car usage, a typical rationalization: "I paid a great deal for my car, so I should drive it more." Do you find evidence of a sunk cost fallacy? How do you interpret it? Focus on the economic reasons

Answer 1

Sunk Cost is a cost that we cannot get back. The sunk cost fallacy is when we continue an action because of our past decisions (time, money, resources) rather than a rational choice of what will maximize our utility at this present time. For example, because we order a big meal and have paid for it, we feel a pressure to eat all the food. In business, a sunk cost fallacy can cost business greater financial losses. A sunk cost is an irretrievable cost. It’s something that you already spent and that you won’t get back, regardless of future outcomes. It’s like that gym club membership you bought: whether you get its benefits or not, the money is gone and there’s no way to get it back.

I can interpret as it penetrates our basic leadership and influences associations, as well as it profoundly influences us at an individual level, as well. Look at a few illustrations:

Bad general life choices: What might you say in regards to holding on an unfulfilling occupation or vocation, since you 'put such a great amount of time in it'? Or then again persevering on an awful relationship, just to 'make every one of those years' justified, despite all the trouble'?

Bad budgetary choices: Do you know any individual who declined to offer something at a flawlessly sensible cost, since they spent such a great amount of cash in it (perhaps property or stocks)? Shouldn't something be said about club card sharks that essentially won't stopped, guaranteeing they have to profit that they officially lost "justified, despite all the trouble"?