Loss_aversion_and_the_sunk_cost_fallacy Sunk_cost

many people have strong misgivings wasting resources (loss aversion). in above example involving non-refundable sporting event ticket, many people, example, feel obliged go event despite not wanting to, because doing otherwise wasting ticket price; feel ve passed point of no return. referred sunk cost fallacy. economists label behavior irrational : inefficient because misallocates resources depending on information irrelevant decision being made.

this line of thinking, in turn, may reflect non-standard measure of utility, subjective , unique consumer. ticket-buyer purchases ticket event won t enjoy in advance makes semi-public commitment watching it. leave make lapse of judgment manifest strangers, appearance might otherwise choose avoid. alternatively, may take pride in having recognized opportunity cost of alternative use of time.

the idea of sunk costs employed when analyzing business decisions. common example of sunk cost business promotion of brand name. type of marketing incurs costs cannot recovered. not typically possible later demote 1 s brand names in exchange cash. second example r&d costs. once spent, such costs sunk , should have no effect on future pricing decisions. pharmaceutical company’s attempt justify high prices because of need recoup r&d expenses fallacious. company charge market prices whether r&d had cost 1 dollar or 1 million dollars. however, r&d costs, , ability recoup costs, factor in deciding whether spend money on r&d. s important distinguish while fallacy, raising prices in order finance future r&d not.

the sunk cost fallacy in game theory known concorde fallacy , referring fact british , french governments continued fund joint development of concorde after became apparent there no longer economic case aircraft. project regarded privately british government commercial disaster should never have been started , cancelled, political , legal issues had made impossible either government pull out.

criticism of fallacy claim

a 2007 article criticises view taking sunk cost account irrational, or fallacy. authors conclude once elements of decision-making environment taken account, reacting sunk costs can understood rational behavior. specifically, authors argue in broad range of situations, rational people condition behavior on sunk costs, because of informational content, reputational concerns, or financial , time constraints.