THE EVOLUTIONARY LOGIC OF HONORING SUNK COSTS

Although economics claims that sunk costs should not figure in current decision‐making, there is ample evidence to suggest that people squander resources by honoring bygones. We argue that such wastage of resources was tolerated in our evolutionary past by Nature because it served fitness‐enhancing...

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Bibliographic Details
Published in:Economic inquiry 2016-04, Vol.54 (2), p.835-846
Main Authors: Eswaran, Mukesh, Neary, Hugh M.
Format: Article
Language:English
Subjects:
Analysis
Costs (Economics)
Decision making
Economic theory
Experimental economics
Methods
Social psychology
Studies
Transaction costs
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Summary:Although economics claims that sunk costs should not figure in current decision‐making, there is ample evidence to suggest that people squander resources by honoring bygones. We argue that such wastage of resources was tolerated in our evolutionary past by Nature because it served fitness‐enhancing functions. In this study, we propose and model one such function. We demonstrate how the honoring of sunk costs could have arisen as a commitment device that Nature found expedient for scenarios where conflicts over temptations between the emotional and rational centers of the brain might sabotage long‐term investments. By applying this idea to the self‐concept, we argue that this model provides a rationale for cognitive dissonance, a well‐established phenomenon in social psychology. (JEL D01, D03)
ISSN:0095-2583
1465-7295
DOI:10.1111/ecin.12287