Sunk Costs: The Big Misconception About Most Investments

Imagine you place a $5,000 non-refundable deposit on a venue for your wedding, but later decide to call everything off. What would be the cost of canceling? If you think it’s $5,000, you fell for what’s known as the sunk cost fallacy — a common cognitive bias.

From an economic perspective, it's what we give up going forward with the decision to cancel and does not include the cost of the venue rental, because no matter whether we get married or not we’re out the $5,000. That choice has already been made and is irreversible. It has become what we call a sunk cost. Because sunk costs cannot be changed going forward, they are not relevant to the next decision.

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THANKS to our patrons
This video was made with the support of our Patrons: Alex Rodriguez, Andrea Basillio Rava, Angela, ArkiTechy, Artur, azad bel, Badrah, Cedric.Wang, David Markham, Delandric Webb, Denis Kraus, Digital INnov8ors, Dr. Matthias Müller-Mellin, Duane Bemister, Esther Chiang, Eva Marie Koblin, Fatenah G Issa, Floris Devreese, Frari63, Gatsby Dkdc, Gerry Labelle, Ginger, Harmoniac Design, ICH KANN DEUTSCH UND ES WAR EINFACH!, Isabelle, Jana Heinze, Jannes Kroon, Jeffrey Cassianna, Jim Pilgrim, Joanne Doyle, John Burghardt, Jonathan Schwarz, Jorge Luis Mejia Velazquez, Justin Keith, Khadijah Sellers, Leonel, Linus Linderoth, Liskaya, Marcel, María, martin, Mathis Nu, Matthias Ruck, Mezes.Macko, Michael Brown, Michael Paradis, Mindozone, Natalie O’Brien, Nicki, Okan Elibol, Oweeda Newton, Paul Hopkins, Peter Bishop, Raymond Fujioka, Roel Vermeulen, Scott Gregory, scripz, Sebastian Huaytan Meder, Si, Stefan Gros, Stephen Clark, Stuart Bishop, Susan Schuster, Tetiana Gerasymova, Tristan Scifo, Victor Paweletz, Yvonne Clapham, Zlatko Minev and all the others.Thank you! To join them visit www.patreon.com/sprouts

COLLABORATORS
Script: Jonas Koblin and Jonas Jaquet
Artist: Pascal Gaggelli
Voice: Matt Abbott
Coloring: Nalin
Editing: Peera Lertsukittipongsa
Sound Design: Miguel Ojeda
Production: Selina Bador
Proofreading: Susan

SOUNDTRACKS
Cannonball Swing - RimskyMusic

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An overview of the sunk costs fallacy.

SOURCES
https://en.wikipedia.org/wiki/Sunk_cost
The Psychology of Sunk Cost - Hal Arkes and Catherine Blumer (1985)
http://www.communicationcache.com/uploads/1/0/8/8/10887248/the_psychology_of_sunk_cost.pdf
The Sunk Cost and Concorde Effects: Are Humans Less Rational than Lower Animals - Hal Arkes and Peter Ayton (1999)
http://www.americandreamcoalition.org/transit/sunkcosteffect.pdf
Mary Hirschfeld on Sunk Costs
https://www.econtalk.org/mary-hirschfeld-on-economics-culture-and-aquinas-and-the-market/

CLASSROOM ACTIVITY
Visit our website to access suggested classroom activity on this topic.

CHAPTER
00:00 Introduction
00:37 Jimmy's story
01:15 Sunk cost fallacy
01:56 experiment by Hal Arkes & Catherine Blumer
02:30 3 psychological reasons behind this behavior
03:14 What was your experience
03:40 Patrons credits
03:50 Ending

#sproutslearning #economics #sunkcost