« Marginal utility and cost-benefit analysis | Main | Mistaking Percentages and Dollar Amounts »

What is Sunk Cost and How Does it Affect Decision Making?

If you just paid $10.00 to participate in the all you can eat buffet, how much should you eat? Most people would say $10.00 and that answer is wrong.

The correct answer is eat until you are happy. Cost becomes irrelevant since eating one plate of fried chicken or ten plates of friend chicken cost you the same amount of money. (Well there is ONE difference: if you eat ten plates of friend chicken the restaurant may prohibit entry to you in the future).

Costs that have already been incurred and are in the past are what economists refer to as sunk costs. You should only be concerned about the future benefits of your chosen option.

Unfortunately most people tend to let sunk costs affect their decision making even if it's pointed out that sunk costs are irrelevant. If the new buffet restauarant opens next door to where you are eating and offers you $500 to eat there would you do it or would you wait until you ate your $10.00 worth of food at your current option?

Post a comment


About

This page contains a single entry from the blog posted on December 4, 2008 1:25 PM.

The previous post in this blog was Marginal utility and cost-benefit analysis.

The next post in this blog is Mistaking Percentages and Dollar Amounts.

Many more can be found on the main index page or by looking through the archives.

Powered by
Movable Type 3.33
See See Works Cited page for credits