Friday, May 24, 2013

There’s actually reason to throw good money after bad

There’s actually reason to throw good money after bad:

“Don’t throw good money after bad.” Any student of economics knows this basic rule, which states that rational agents should not take irrecoverable or “sunk” costs into account when making decisions about present or future investments. Nevertheless, human beings break this rule all the time, succumbing to a cognitive bias known as the “sunk-cost fallacy.” If you have ever sat through a bad movie because you did not want to “waste” the money you paid for the ticket or finished a PhD program you lost interest in years ago because of all the work you had already done, you have made this mistake. But what if it were not always a mistake—what if, in certain situations, this “fallacy” were actually an optimal decision-making strategy?

Posted on infosnack.

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