A Revisit to Sunk Cost Fallacy for Two-Stage Stochastic Binary Decision Making

Abstract

This paper undertakes a revisit of the sunk cost fallacy, which refers to the tendency of people to persist investing resources into something, even if it is destined to have no good outcome. We emphasize that the utilities associated with different alternatives are not static for decision makers, which is exactly opposite to the traditional perspective. This paper argues that the utility of an option may change due to the choice of another option, suggesting that decisions considered irrational by the traditional analytical method, i.e., sunk cost fallacy, may be rational. We propose a novel analytical method for decision making with sunk cost when considering the utility change and validate the effectiveness of this method through mathematical modeling and computational experiments. This paper mathematically describes such decision-making problems, analyzing the impact of changes in the utilities across different alternatives on decision making with a real-world example. Furthermore, we develop a two-stage stochastic optimization model for such decision-making problems and employ the sample average approximation (SAA) method to solve them. The results from computational experiments indicate that some decisions traditionally considered irrational are, in fact, rational when the utility of an option changes as a result of choosing another option. This paper, therefore, highlights the significance of incorporating utility changes into the decision-making process and stands as a valuable addition to the literature, offering a refreshed and effective decision-making method for improved decision making.

Keywords

• sunk cost fallacy
• decision analysis
• two-stage stochastic optimization
• sample average approximation