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Do Sunk Costs Matter?

35 Pages Posted: 17 Jul 2007  

R. Preston McAfee

Yahoo! Research Labs

Hugo M. Mialon

Emory University - Department of Economics

Sue H. Mialon

Emory University

Multiple version iconThere are 2 versions of this paper

Date Written: July 16, 2007

Abstract

That sunk costs are not relevant to rational decision-making is often presented as one of the basic principles of economics. When people are influenced by sunk costs in their decision-making, they are said to be committing the sunk cost fallacy. Contrary to conventional wisdom, we argue that, in a broad range of situations, it is rational for people to condition behavior on sunk costs, because of informational content, reputational concerns, or financial and time constraints. Once all the elements of the decision-making environment are taken into account, reacting to sunk costs can often be understood as rational behavior.

Keywords: Sunk Costs, Rationality, Information, Reputation, Constraints

JEL Classification: D0, D01, D8, D81, D83, D9, D90

Suggested Citation

McAfee, R. Preston and Mialon, Hugo M. and Mialon, Sue H., Do Sunk Costs Matter? (July 16, 2007). Available at SSRN: https://ssrn.com/abstract=1000988 or http://dx.doi.org/10.2139/ssrn.1000988

Randolph McAfee

Yahoo! Research Labs ( email )

Pasadena, CA 91103
United States

Hugo Mialon (Contact Author)

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

Sue Mialon

Emory University ( email )

Department of Economics
1602 Fishburne Dr.
Atlanta, GA 30322
United States
404-712-8169 (Phone)

HOME PAGE: http://www.suemialon.net

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