Name ……Nyein Sandar Thwin….. I.D. …6517193010…
500-614“Managerial Economics”
1. According to the article, why many people cannot ignore sunk costs easily in their
decision making?
● Many people find it difficult to ignore sunk costs in their decision-making due to a
cognitive bias known as the "sunk cost fallacy." There are several reasons why
people struggle to ignore sunk costs:
● Loss aversion: Humans have a natural aversion to losses. We tend to feel the pain
of losing something more strongly than the pleasure of gaining something
equivalent. Sunk costs represent losses, and people often want to avoid feeling
that loss, leading them to continue investing in a project or situation.
● Justification and rationalization: People tend to justify their past decisions and
actions to maintain a consistent self-image. Ignoring sunk costs may require
admitting that previous investments were in vain or made in error, which can be
psychologically challenging.
● Emotional attachment: When people invest time, money, or effort into something,
they can develop an emotional attachment to it. They may become personally
invested in the outcome and feel a sense of ownership.
● Uncertainty and regret: Ignoring sunk costs introduces uncertainty, as it involves
cutting losses and potentially facing the regret of making a wrong decision.
2. Describe main differences between sunk cost and fixed cost.
The main differences between sunk cost and fixed cost:
Sunk Cost
● Sunk cost refers to costs that have already been incurred and cannot be
recovered, regardless of future actions or decisions.
● Sunk costs are historical costs that are irrelevant to current and future decisionmaking. They are costs that have already been "sunk" or spent.
● Sunk costs should not be considered when making rational decisions. They are
considered irrelevant because they cannot be changed or recovered.
Fixed Cost
● Fixed cost refers to costs that do not vary with changes in production or sales
volume within a specific time period.
● Fixed costs are expenses that remain constant regardless of the level of output or
sales. They are incurred regularly, regardless of how much or how little a company
produces.
● Fixed costs are important for decision-making as they need to be covered by
revenue generated. They are a crucial factor in determining a company's breakeven point and profitability.