Sunk costs are irrecoverable investments of time or money. Since sunk costs were already spent (i.e., we can’t re-spend the $100 that we already spent on non-refundable soccer tickets), it’s irrational to include them in our decision making. The fact that we spent $100 on soccer tickets should not influence whether we subsequently attend the
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In general, we try to make decisions that we think will maximize our expected utility. Typically, we conceptualize expected utility as a property resulting from the product we buy — i.e., we buy chocolate cake because it tastes good. So why do people buy booger flavored Jelly Beans? To answer this question, we have to revisit
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As I wrote in an earlier post, there are multiple forms of rationality. When psychologists find deviations from rationality, they usually refer to violations of rational choice axioms – i.e., procedural rationality. There are multiple ways to think about procedural rationality, but the most common axioms are derived from utility theory. In the literature, these axioms
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There are three definitions to rationality. Let’s briefly explore them.
As I discussed in an earlier article that you should read for context, prospect theory has a wide range of implications on behavioral economics. One area in which prospect theory is particularly important is in the domain of mental accounting, which concerns how the way in which we think about and categorize financial activities can
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