ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The sunk cost fallacy describes our tendency to continue to pursue an endeavor that we have already committed to in terms of investing money, time or effort into it, even if those costs are not recoverable.

Detailed explanation-2: -In both economics and business decision-making, sunk cost refers to costs that have already happened and cannot be recovered. Sunk costs are excluded from future decisions because the cost will be the same regardless of the outcome. The sunk cost fallacy arises when decision-making takes into account sunk costs.

Detailed explanation-3: -Sunk costs are those which have already been incurred and which are unrecoverable. In business, sunk costs are typically not included in consideration when making future decisions, as they are seen as irrelevant to current and future budgetary concerns.

Detailed explanation-4: -Choosing to finish a boring movie because you already paid for the ticket is an example of the sunk cost fallacy. Another example is keeping an incompetent employee on staff rather than replacing them because the company has already invested tens of thousands of dollars training them.

Detailed explanation-5: -For example, winning $100 feels good-but losing $100 feels horrible. As a result, we’ll go out of our way to avoid losing $100, even if that means sacrificing our chance to win. With the sunk cost fallacy, loss aversion makes us stick with poor investments because we don’t want to feel bad about losing.