Keywords: Sunk Costs, Rationality, Information, Reputation, Constraints. * R. Preston McAfee, Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125 (Email: email@example.com, Phone: 626-395-3476, Fax: 626-793-4681); Hugo M. Mialon, Department of Economics, Emory University, Atlanta, GA 30322-2240 (E-mail: firstname.lastname@example.org, Phone: 404-408-8333, Fax: 404-727- 4639); Sue H. Mialon, Department of Economics, University of North Dakota, Grand Forks, ND 58202 (E-mail: email@example.com, Phone: 701-777-3349, Fax: 701-777-3365). 1
“Let Bygones Be Bygones.”
Khieu Samphan, former head of state of the Khmer Rouge government, asking Cambodians to forget the more than one million people who died under his government’s rule.
Sunk costs are costs that have already been incurred and cannot be recovered. Sunk costs do not change regardless of which action is presently chosen. Therefore, an individual should ignore sunk costs to make a rational choice. Introductory textbooks in economics present this as a basic principle and a deep truth of rational decision-making (Frank and Bernanke, 2006, p. 10, and Mankiw, 2004, p. 297).
Nonetheless, people are apparently often influenced by sunk costs in their decisionmaking. Once individuals have made a large sunk...