Do Sunk Costs Matter?

14 Pages Posted: 29 Mar 2010

See all articles by R. Preston McAfee

R. Preston McAfee

Yahoo! - Yahoo! Research Labs

Hugo M. Mialon

Emory University - Department of Economics

Sue H. Mialon

Emory University

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Abstract

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.

JEL Classification: D0, D01, D8, D81, D83, D9, D90

Suggested Citation

McAfee, Randolph Preston and Mialon, Hugo M. and Mialon, Sue H., Do Sunk Costs Matter?. Economic Inquiry, Vol. 48, Issue 2, pp. 323-336, April 2010, Available at SSRN: https://ssrn.com/abstract=1578513 or http://dx.doi.org/10.1111/j.1465-7295.2008.00184.x

Randolph Preston McAfee (Contact Author)

Yahoo! - Yahoo! Research Labs ( email )

Sunnyvale, CA 94089
United States

Hugo M. Mialon

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

Sue H. Mialon

Emory University ( email )

Department of Economics
1602 Fishburne Dr.
Atlanta, GA 30322
United States
404-712-8169 (Phone)

HOME PAGE: http://www.suemialon.net

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