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Sunk Cost Effect Essay

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This paper tries to explain the effect of an economic term, namely sunk cost. The analysis of the sunk cost effect was handled to three stages. First, demonstrations of the effect were presented. Second, possible explanations of the effect were offered. Third, the relation between the sunk cost effect and several areas of psychological research were examined.
The sunk cost effect cannot completely analyze under any social psychological theory. Sunk cost is an unrecoverable cost, so no matter the size of the cost it has gone. Sunk cost effect is an irrational economic behavior that arises when a person makes an investment in money, effort, or time. If a person has incurred a sunk cost about anything, thus this person will exaggerate his expectation …show more content…

These are the value function and certainty effect. Value function feature depicts the relation between defined gains and losses and the subjective value a person places on such gains and losses. In other words, the person who had paid for something will want to use that thing even if it gives less utility. Certainty effect says that the value of certain gains is overvalued and the value of certain losses is undervalued. Certainty effect magnifies both positive and negative values. Prospect theory does not specify the psychological basis for the findings that sure losses are so aversive and sunk costs difficult to ignore. Why people continue to spend more although they had a sunk cost? Or why people throw good money after bad money? The psychological reason is that if people stop to invest more for a project it will meant that they accept their faults. So, it will give an aversive reason. Once a person had a sunk cost, then he will likely act as if the former spending was logical. The responsibility of the sunk cost changes the degree of wastefulness. If one is personally responsible for the sunk cost, then this increases the wastefulness of sunk cost. If someone else’s investment or effort is involved, then the degree of wastefulness will be less compared to the previous case (Staw,

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