You might be able to convince an incredulous friend that you will attend the concert by showing them that you have already purchased a ticket if your friend knows that you tend to honor sunk costs, this will give them good reason to believe that you will attend the concert. Similarly, the tendency to honor sunk costs can be utilized to convince others that you will do something. If you know that you have a tendency to honor sunk costs, then you can, on Friday, increase the likelihood that on Saturday you will do what you think you should do by purchasing the ticket in advance. Suppose that on Friday you think that you should go to the concert on Saturday because it will be educational, but you anticipate that once Saturday afternoon rolls around you will have trouble mustering the motivation to get off the couch. The philosopher Robert Nozick has argued that it can be utilized to counteract the tendency to act against one’s considered judgment about what one should do. One reason for being suspicious is that the tendency to honor sunk costs can be leveraged in useful ways. However, several philosophers have argued that this orthodoxy is mistaken. To those who are unaware of those constraints, a rational action can look irrational.Īll this can perhaps be acknowledged by the defender of sunk cost orthodoxy. A rational actor must act within the constraints that apply to him. But individuals can’t always control their emotions, and families can’t always control their dynamics. True, the underlying dispositions may be irrational. Again, it might be all-things-considered best to go to Yosemite despite the smoke. Or suppose you know that skipping the vacation will cause family conflict to bubble up down the line. In this case, it might be perfectly rational for you to attend the concert in order to avoid this feeling. Suppose you know that if you choose not to go to the concert, you will inevitably feel bad about wasting money. Moreover, sometimes what looks from the outside like honoring sunk costs is really something else. Sometimes actors should attend to sunk costs because those costs constitute evidence bearing on the likelihood of future success.Ī firm that has invested extensive resources into a fruitless project would be foolish to ignore those investments when deliberating about whether to continue dedicating resources to the project, since the sunk costs may constitute good evidence that future investments will also be fruitless. But things are not quite as simple as they seem.įirst, the claim that “historical costs are irrelevant for present decision making” can easily be misunderstood. He compounds, rather than recoups, his losses. Someone who foregoes better outcomes simply because he has incurred costs that are irretrievably lost irrationally leaves goods on the table for nothing in return. So, the rational actor shouldn’t take them into account in deciding what to do. But sunk costs are by definition unrecoverable. This requires him to attend to the potential consequences of his actions. The rational actor aims to promote the best possible outcome. The underlying idea is something like the following. In everyday life, however, this implication of economic theory is frequently neglected thus forming another instance of irrational behavior. For example, the textbook Psychology in Economics and Business proclaims:Įconomic theory implies that historical costs are irrelevant for present decision making and only costs and benefits should be taken into account. That this tendency is irrational is often considered axiomatic and taught as such. Psychologists tell us that humans regularly honor sunk costs. The only other option is a staycation, which would be low-grade fun and relaxing.Ī family that decides to go on vacation simply because they have already invested resources into that vacation honors sunk costs. Yet the money you spent on booking can’t be recouped. You know that if you take the vacation as planned, you will be forced to stay indoors on account of the smoke and will experience virtually no fun or relaxation. Unfortunately, though, Yosemite is on fire. Your family has booked an expensive vacation to Yosemite with the intention of having a fun, relaxing vacation. This is an example of what’s often called the ‘sunk cost fallacy.’ Regardless of what you should do, many of us would go to the concert, in full knowledge that staying in would be time better spent, because we have already paid for the ticket. You already purchased a concert ticket for $400, which you can’t recoup. I think we can all agree that this would be reasonable. You realize that you would, on the whole, have a much better evening if you stayed home. You had planned to attend a concert, but you’re feeling tired. You are lazing on the couch, thinking about your evening.
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