Sunk Cost and Commitment Bias Quiz

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.