Sunk Cost and Commitment Bias Quiz

Study Notes

Sunk Cost: Key Points

Sunk costs are costs that have already been incurred and cannot be recovered.
In decision-making, sunk costs are contrasted with prospective costs, which are future costs that may be avoided if action is taken.
According to classical economics and standard microeconomic theory, only prospective (future) costs are relevant to a rational decision.
The bygones principle is grounded in the branch of normative decision theory known as rational choice theory, particularly in expected utility hypothesis.
Sunk costs are irrelevant to rational decisions.
There are cases in which taking sunk costs into account in decision-making, violating the bygones principle, is rational.
The sunk cost fallacy is demonstrated in people's decisions, with people believing that investments (i.e., sunk costs) justify further expenditures.
Plan continuation bias is recognised as a subtle cognitive bias that tends to force the continuation of an existing plan or course of action even in the face of changing conditions.
Evidence from behavioral economics suggests that there are at least five specific psychological factors underlying the sunk cost effect.
The sunk cost effect may reflect non-standard measures of utility, which is ultimately subjective and unique to the individual.
The framing effect which underlies the sunk cost effect builds upon the concept of extensionality where the outcome is the same regardless of how the information is framed.
The sunk cost effect has implications for finance, economics, and securities markets in particular.The Psychology of Commitment and Consistency
Commitment and consistency are important factors in human behavior.
People tend to behave consistently with their past decisions and actions.
The desire to appear consistent can lead people to make commitments they would not have made otherwise.
Once people make a commitment, they tend to become more invested in it and more confident in their decision.
Overoptimistic probability bias is when people become more confident in their decisions after committing to them.
Sense of personal responsibility can also affect commitment, with people who feel more responsible for a decision making larger investments in that decision.
The desire not to appear wasteful can also contribute to commitment, as people may feel that leaving an event they paid for would be a waste of money.
Commitment can also be influenced by the way decisions are framed or presented.
The foot-in-the-door technique is a way to increase commitment by getting people to agree to a small request before asking for a larger one.
Commitment can also be increased by making people feel like they have a stake in a decision, such as by involving them in the decision-making process.
Once people have made a commitment, they may experience cognitive dissonance if they encounter information that contradicts their decision.
Commitment can be a powerful motivator, but it can also lead people to stick with decisions that are no longer in their best interest.

Description

Test your knowledge on two important concepts in decision-making: sunk cost and commitment bias. In this quiz, you will learn about the key points of each concept, including their definitions, implications, and psychological factors. From classical economics to behavioral economics, this quiz covers a wide range of theories and research on decision-making. Take the quiz to see how much you know about sunk cost and commitment bias, and how they affect our choices in daily life.