Sunk costs & applicability in real life

Um, i have a big essay in progress on the above captioned subject. But somewhere in the middle, last week i think, I sort of felt that the whole thing was turning out to be too whiny and full of needless personal details – and will most probably not publish it here.

I wont let that stop me atleast introducing the idea here. WTF, it atleast makes up for my prolonged absence. No ?

( i might do an annotation job on this post with stuff from my earlier essay if i am in the mood later today.)

Here goes:

Quote

In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be either fixed (that is, they are not dependent on the volume of economic activity, however measured) or variable (dependent on volume).

In traditional microeconomic theory, only prospective (future) costs are relevant to an investment decision. Traditional economics proposes that an economic actor not let sunk costs influence one's decisions, because doing so would not be rationally assessing a decision exclusively on its own merits. The decision-maker may make rational decisions according to their own incentives; these incentives may dictate different decisions than would be dictated by efficiency or profitability, and this is considered an incentive problem and distinct from a sunk cost problem.

Evidence from Behavioral economics suggests this theory fails to predict real-world behavior. Sunk costs greatly affect actors' decisions, because humans are inherently loss-averse and thus normally act irrationally when making economic decisions.

Sunk costs should not affect the rational decision maker's best choice. However, until a decision-maker irreversibly commits resources, the prospective cost is an avoidable future cost and is properly included in any decision-making processes. For example, if you are considering pre-ordering movie tickets, but have not actually purchased them yet, the cost remains avoidable. If the price of the tickets rises to an amount that requires you to pay more than the value you place on them, the change in prospective cost should be figured into the decision-making, and the decision should be reevaluated.

Unquote

- The whole thing is (rather shamelessly, if i might add) nicked, verbatim, from here.

I strongly encourage folks to go over to the main wikipedia article and make themselves familiar with fundae like ‘the Overly optimistic probability bias’, ‘The Sunk cost fallacy’, ‘The Sunk cost dilemma’ and ‘the bygones principle’.

P.s This is a pretty familiar concept actually. But off late - reading & writing pages of stuff on such gyaan is JUST the kind of wonkery that i enjoy spending time on.