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KELLOGG.NORTHWESTERN

Is the Sunk Cost Fallacy Actually Smart Business?

Is the Sunk Cost Fallacy Actually Smart Business?

insight.kellogg.northwestern.edu

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Sunk Cost Fallacy

Any student of economics knows this basic rule, which states that rational agents should not take irrecoverable or “sunk” costs into account when making decisions about present or future investments. Nevertheless, human beings break this rule all the time, succumbing to a cognitive bias known as ...

But what if this behaviour was not always a mistake—what if, in certain situations, this “fallacy” were actually an optimal decision-making strategy?

Human beings—even rational ones—have a limited capacity to remember the original reasoning behind their decisions. If that capacity...

The Sunk Cost fallacy, then is a useful mental shortcut passed down to us by our savannah-dwelling ancestors.

We call it the ‘theory of the second best': The more you can remember, the better it is, and you don’t have to commit this fallacy at all. But if it’s a common feature of human bei...

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