Sunk cost fallacy - Revision history

Vipul: /* Examples */

2011-05-07T15:08:15Z

Examples

← Older revision		Revision as of 15:08, 7 May 2011
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	Suppose a person is planning to buy an object <math>A</math>. Consider the following two scenarios:		Suppose a person is planning to buy an object <math>A</math>. Consider the following two scenarios:

	* ''The person loses the same amount of money as the cost of <math>A</math> before buying <math>A</math>~~'': There are two alternatives:~~		{\| class="sortable" border="1"
	*# Do not buy <math>A</math>		! Case !! Non-buy option !! Buy option
	*# Buy <math>A</math>.		\|-
	* ''The person buys and then loses the object <math>A</math>~~'': There are two alternatives:~~		\| The person loses the same amount of money as the cost of <math>A</math> before buying <math>A</math> \|\| Do not buy <math>A</math> \|\| Buy <math>A</math>
	*# Do not buy <math>A</math>.		\|-
	*# Buy <math>A</math>.		\| The person buys and then loses the object <math>A</math>, without retrieving any value from the purchase of <math>A</math> \|\| Do not buy <math>A</math> \|\| Buy <math>A</math> (again)
			\|}

	~~In both cases, options (1) and (2) result in the same end situation for the person. Hence, whether a person chooses between (1) and (2) should, assuming~~ [[rational behavior]], be independent of whether the person loses the money or the object. However, what the sunk cost fallacy predicts that losing the object <math>A</math> makes the person ''less'' likely to buy another copy of <math>A</math>, because the person does not want to ''admit'' that the initial purchase of <math>A</math> was wasteful.		Assuming [[rational behavior]], whether a person chooses to buy or not buy should be independent of whether the person loses the money or the object. However, what the sunk cost fallacy predicts that losing the object <math>A</math> makes the person ''less'' likely to buy another copy of <math>A</math>, because the person does not want to ''admit'' that the initial purchase of <math>A</math> was wasteful.

	(On the other hand, the sunk cost fallacy might predict the reverse, if the person has already made other, related fixed expenditures that are complementary to having <math>A</math> and does not want to admit that those expenditures were wasteful).		(On the other hand, the sunk cost fallacy might predict the reverse, if the person has already made other, related fixed expenditures that are complementary to having <math>A</math> and does not want to admit that those expenditures were wasteful).

Vipul at 21:39, 20 June 2009

2009-06-20T21:39:20Z

← Older revision		Revision as of 21:39, 20 June 2009
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	==Statement==		==Statement==

	The '''sunk cost fallacy''' is the observation that people may behave in irrational or counterproductive ways because of being influenced by [[sunk cost]]s (costs that they have already incurred and have no way of recovering, and which should be irrelevant to rational decision-making) in a way as to minimize the feeling that these sunk costs were wasteful.		The '''sunk cost fallacy''' is the observation that people may behave in irrational or counterproductive ways because of being influenced by [[defining ingredient::sunk cost]]s (costs that they have already incurred and have no way of recovering, and which should be irrelevant to rational decision-making) in a way as to minimize the feeling that these sunk costs were wasteful.

	==Examples==		==Examples==

Vipul: /* Loss of item versus loss of money */

2009-06-20T21:35:38Z

Loss of item versus loss of money

← Older revision		Revision as of 21:35, 20 June 2009
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	*# Buy <math>A</math>.		*# Buy <math>A</math>.
	* ''The person buys and then loses the object <math>A</math>'': There are two alternatives:		* ''The person buys and then loses the object <math>A</math>'': There are two alternatives:
	*# Do ~~nothing~~.		*# Do not buy <math>A</math>.
	*# Buy ~~another copy of~~ <math>A</math>.		*# Buy <math>A</math>.

	In both cases, options (1) and (2) result in the same end situation for the person. Hence, whether a person chooses between (1) and (2) should, assuming [[rational behavior]], be independent of whether the person loses the money or the object. However, what the sunk cost fallacy predicts that losing the object <math>A</math> makes the person ''less'' likely to buy another copy of <math>A</math>, because the person does not want to ''admit'' that the initial purchase of <math>A</math> was wasteful.		In both cases, options (1) and (2) result in the same end situation for the person. Hence, whether a person chooses between (1) and (2) should, assuming [[rational behavior]], be independent of whether the person loses the money or the object. However, what the sunk cost fallacy predicts that losing the object <math>A</math> makes the person ''less'' likely to buy another copy of <math>A</math>, because the person does not want to ''admit'' that the initial purchase of <math>A</math> was wasteful.

Vipul: Created page with '==Statement== The '''sunk cost fallacy''' is the observation that people may behave in irrational or counterproductive ways because of being influenced by sunk costs (costs ...'

2009-06-20T21:35:03Z

Created page with '==Statement== The '''sunk cost fallacy''' is the observation that people may behave in irrational or counterproductive ways because of being influenced by sunk costs (costs ...'

New page

==Statement==

The '''sunk cost fallacy''' is the observation that people may behave in irrational or counterproductive ways because of being influenced by [[sunk cost]]s (costs that they have already incurred and have no way of recovering, and which should be irrelevant to rational decision-making) in a way as to minimize the feeling that these sunk costs were wasteful.

==Examples==

===Resale price===

===Loss of item versus loss of money===

Suppose a person is planning to buy an object <math>A</math>. Consider the following two scenarios:

* ''The person loses the same amount of money as the cost of <math>A</math> before buying <math>A</math>'': There are two alternatives:
*# Do not buy <math>A</math>
*# Buy <math>A</math>.
* ''The person buys and then loses the object <math>A</math>'': There are two alternatives:
*# Do nothing.
*# Buy another copy of <math>A</math>.

In both cases, options (1) and (2) result in the same end situation for the person. Hence, whether a person chooses between (1) and (2) should, assuming [[rational behavior]], be independent of whether the person loses the money or the object. However, what the sunk cost fallacy predicts that losing the object <math>A</math> makes the person ''less'' likely to buy another copy of <math>A</math>, because the person does not want to ''admit'' that the initial purchase of <math>A</math> was wasteful.

(On the other hand, the sunk cost fallacy might predict the reverse, if the person has already made other, related fixed expenditures that are complementary to having <math>A</math> and does not want to admit that those expenditures were wasteful).

==Behavioral explanations/alternatives for the sunk cost fallacy==

===Anchoring===

{{further|[[Anchoring and adjustment heuristic]]}}

One example of the sunk cost fallacy is that the price a person paid for a commodity influences the price the person is willing to accept to sell the commodity, even if that price differs substantially both from the price potential buyers are willing to pay and the value the person attaches to the commodity. This is explained partially by anchoring, where the original price paid to acquire the commodity is treated as an anchor against which the sale price should be measured.

===Endowment effect===

{{further|[[Endowment effect]]}}

Another effect observed in behavioral economics, that is similar, but distinct, from the sunk cost fallacy is the endowment effect. The endowment effect is the effect whereby the value a person assigns to an object increases after a [[property right]] to the object has been established.

The key difference between the endowment effect and the sunk cost fallacy is that in the latter, the initial price paid plays a disproportionate role in determining the value the person attaches to the object. For instance:

* Under the sunk cost fallacy, something that was obtained at a significant discount, or as a gift, may be valued as much less than the same item for which a high price was paid. The endowment effect makes no such prediction.
* Under the sunk cost fallacy, people are less willing to buy another copy of an item they lost. This cannot be explained by the endowment effect, which might in fact predict that people who have lost an item are ''more'' likely to purchase another copy than people who haven't yet bought it, because an association with the object creates a property right.