Do Sunk Costs Matter?
35 Pages Posted: 17 Jul 2007
Date Written: July 16, 2007
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: Suggested Citation