Wednesday, July 29, 2009

Understanding and Correcting for Sunk Costs

Too many people (and organizations) succumb to the sunk cost fallacy - which is to say that they're influenced by the money that they've already spent and is unrecoverable. Falling for sunk costs can be highly expensive. It's also one of the first things you learn in Econ 101. Here's a gut check for whether or not you succumb to the fallacy (MessyMatters):

Scene: You have a non-refundable flight but now the opportunity to road trip with some friends to your destination has come up. Which of the following are rational and which are irrational:

  1. “I might do that much driving to save the flight costs but since the flight is paid for I’d rather take it.”
  2. “That flight was so expensive that I had to forgo another part of my vacation, so not using the flight is not really an option.”
  3. “I’m willing to blow off the flight if it was cheap enough.”
  4. “I’m going to drive because that’s what I would’ve done if I had considered the driving option in the first place; what’s happened since then is irrelevant.”
  5. “I’m going to fly because that’s what I would’ve done even if I had known about the driving option in the first place.”
Read on at Messy Matters for the answers.

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