🔥🔥🔥 The Pros And Cons Of Sunk Cost Fallacy

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The Pros And Cons Of Sunk Cost Fallacy

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Sunk Cost Fallacy And Why You Should Quit

For example, consuming demerit goods like alcohol or not saving sufficiently for retirement. The insight of present bias suggests we make decisions our future self would not make. If we become aware of these bias and irrational behaviour, then we can make better decisions which improve our long-term welfare. See: Behavioural economics. Another issue in behavioural economics is that of irrational exuberance or when we get carried away by an asset bubble.

Can we be sure we will not get carried away by a boom and bubble? History suggests that many investors are over-optimistic about their ability to leave the market at the optimal time and can feel that this time is different. See: Irrational exuberance. Nothing is black and white in economics; it depends. For example, government borrowing to finance pensions for an ageing population can lead to an unsustainable rise in government debt.

However, government borrowing during a recession can help the economy recover. If we like chocolate cake, why do we not eat three per day? The reason is diminishing returns. The third cake may make us sick and give a negative utility. People may have different opinions about when diminishing returns set in. Some students may feel this is after the second pint, other students only after considerably more. There are also diminishing returns to money. A similar concept is that of diminishing returns to wealth and income. Yes, but it depends on our current income. The importance of this is for choosing the right balance between work and leisure.

What is the value in working a long working week, if the extra money earnt has a limited marginal utility? Economics may feel we are promoting selfish ends — firms maximise profits, consumers maximise their personal utility. Adam Smith claimed pursuing selfish goals ended up in improving the greater good. But, in economics, we also try to consider the impact of our actions on other people. If a firm produces chemicals, it may make a profit, but cause an external cost of pollution. To ignore this external cost would be to create an inefficient outcome. We should make the firm pay the cost of its pollution so that it has the incentive to minimise or halt external costs.

Externalities are everywhere. Even your decision to study economics could have positive externalities in the future. For example, you could end up being an economics teacher helping others learn all about economics. The free market has many advantages. Private firms tend to be more efficient, innovative and respond to consumer preferences. However, many goods and services would either be not provided or under-provided in a free market. Public goods like street lighting and law and order.

Also, public services like health care and education would be provided in insufficient quantities. Therefore, to optimise social welfare there is a need for government intervention through taxes and direct public provision. We may dislike taxes, but we would dislike not being able to see a doctor. There are concerns that new technology and automation will lead to job losses and some people losing out. If our job is threatened by new technology is the fear justified?

Economic analysis suggests there it is a fallacy that new technology leads to permanent job losses. This is known as the Luddite Fallacy — though some jobs are lost, new ones are created. Automation and new technology are not guaranteed to make everyone better off — especially in the short term. See: Pros and cons of automation. Everyone is affected in some way by macroeconomic issues such as inflation and unemployment.

Inflation can reduce the value of your savings. Mass unemployment can cause society to fragment, therefore there is a need to adopt policies to try and reduce unemployment. The Life Cycle Hypothesis states that to maximise lifetime utility, we should try to smooth our consumption patterns over the course of our life. It is not good to have substantial income when we are old and unable to move. Spending some money in our student years will give greater overall utility. This justifies taking out a student loan to pay back when we are working and then saving for a pension in our retirement.

Last updated: 10th November , Tejvan Pettinger , www. Very comprehensive thoughts. For example , when you go to mall to purchase your daily needs or other products, you simply calculate opportunity cost between two products. Soon meet you with more such concepts. I like this. I really helps me as I have to constantly explain these concepts everyday. Quote inspiring. Our everyday application of Economics concepts are enormously. We always use public roads ,streetlights, sewer lines and public security.

We also complain about those not using them well without knowing that once these goods and services are provides, we can not stop others from using it, neither can the consumption by others reduce the quantity available for our consumption. Buying goods which give the highest satisfaction for the price This is common sense, but in economics, we give it the term of marginal utility theory. See: Extra charges by airlines Sunk cost fallacy A sunk cost is an irretrievable cost, something we cannot get back. See: sunk cost fallacy Opportunity Cost Photo: Takver The first lesson of economics is the issue of scarcity and limited resources. Great, i like economics, its interesting and fascinating. Very easily explained. Make more like these. Being an economics student ,it is Very informative for me ….

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This cookie is associated with Quantserve to track anonymously how a user interact with the website. Researchers have concluded that differences in decision-making are not due to a lack of logic or reasoning, but more due to the immaturity of psychosocial capacities that influence decision-making. Examples of their undeveloped capacities which influence decision-making would be impulse control, emotion regulation, delayed gratification and resistance to peer pressure. In the past, researchers have thought that adolescent behavior was simply due to incompetency regarding decision-making.

Currently, researchers have concluded that adults and adolescents are both competent decision-makers, not just adults. However, adolescents' competent decision-making skills decrease when psychosocial capacities become present. Research [61] has shown that risk-taking behaviors in adolescents may be the product of interactions between the socioemotional brain network and its cognitive-control network. The socioemotional part of the brain processes social and emotional stimuli and has been shown to be important in reward processing. The cognitive-control network assists in planning and self-regulation.

Both of these sections of the brain change over the course of puberty. However, the socioemotional network changes quickly and abruptly, while the cognitive-control network changes more gradually. Because of this difference in change, the cognitive-control network, which usually regulates the socioemotional network, struggles to control the socioemotional network when psychosocial capacities are present. When adolescents are exposed to social and emotional stimuli, their socioemotional network is activated as well as areas of the brain involved in reward processing. Because teens often gain a sense of reward from risk-taking behaviors, their repetition becomes ever more probable due to the reward experienced. In this, the process mirrors addiction.

Teens can become addicted to risky behavior because they are in a high state of arousal and are rewarded for it not only by their own internal functions but also by their peers around them. A recent study suggests that adolescents have difficulties adequately adjusting beliefs in response to bad news such as reading that smoking poses a greater risk to health than they thought , but do not differ from adults in their ability to alter beliefs in response to good news.

Adults are generally better able to control their risk-taking because their cognitive-control system has matured enough to the point where it can control the socioemotional network, even in the context of high arousal or when psychosocial capacities are present. Also, adults are less likely to find themselves in situations that push them to do risky things. For example, teens are more likely to be around peers who peer pressure them into doing things, while adults are not as exposed to this sort of social setting. Biases usually affect decision-making processes.

Here is a list of commonly debated biases in judgment and decision-making :. In groups, people generate decisions through active and complex processes. One method consists of three steps: initial preferences are expressed by members; the members of the group then gather and share information concerning those preferences; finally, the members combine their views and make a single choice about how to face the problem. Although these steps are relatively ordinary, judgements are often distorted by cognitive and motivational biases, include "sins of commission", "sins of omission", and "sins of imprecision". Herbert A. Simon coined the phrase " bounded rationality " to express the idea that human decision-making is limited by available information, available time and the mind's information-processing ability.

Further psychological research has identified individual differences between two cognitive styles: maximizers try to make an optimal decision , whereas satisficers simply try to find a solution that is "good enough". Maximizers tend to take longer making decisions due to the need to maximize performance across all variables and make tradeoffs carefully; they also tend to more often regret their decisions perhaps because they are more able than satisficers to recognize that a decision turned out to be sub-optimal. The psychologist Daniel Kahneman , adopting terms originally proposed by the psychologists Keith Stanovich and Richard West, has theorized that a person's decision-making is the result of an interplay between two kinds of cognitive processes : an automatic intuitive system called "System 1" and an effortful rational system called "System 2".

System 1 is a bottom-up, fast, and implicit system of decision-making, while system 2 is a top-down, slow, and explicit system of decision-making. Styles and methods of decision-making were elaborated by Aron Katsenelinboigen , the founder of predispositioning theory. In his analysis on styles and methods, Katsenelinboigen referred to the game of chess, saying that "chess does disclose various methods of operation, notably the creation of predisposition-methods which may be applicable to other, more complex systems. Katsenelinboigen states that apart from the methods reactive and selective and sub-methods randomization, predispositioning, programming , there are two major styles: positional and combinational.

Both styles are utilized in the game of chess. The two styles reflect two basic approaches to uncertainty : deterministic combinational style and indeterministic positional style. Katsenelinboigen's definition of the two styles are the following. In defining the combinational style in chess, Katsenelinboigen wrote: "The combinational style features a clearly formulated limited objective, namely the capture of material the main constituent element of a chess position. The objective is implemented via a well-defined, and in some cases, unique sequence of moves aimed at reaching the set goal.

As a rule, this sequence leaves no options for the opponent. Finding a combinational objective allows the player to focus all his energies on efficient execution, that is, the player's analysis may be limited to the pieces directly partaking in the combination. This approach is the crux of the combination and the combinational style of play. In playing the positional style, the player must evaluate relational and material parameters as independent variables.

The positional style gives the player the opportunity to develop a position until it becomes pregnant with a combination. However, the combination is not the final goal of the positional player — it helps him to achieve the desirable, keeping in mind a predisposition for the future development. The pyrrhic victory is the best example of one's inability to think positionally. According to Isabel Briggs Myers , a person's decision-making process depends to a significant degree on their cognitive style. The terminal points on these dimensions are: thinking and feeling ; extroversion and introversion ; judgment and perception ; and sensing and intuition.

She claimed that a person's decision-making style correlates well with how they score on these four dimensions. For example, someone who scored near the thinking, extroversion, sensing, and judgment ends of the dimensions would tend to have a logical, analytical, objective, critical, and empirical decision-making style. However, some psychologists say that the MBTI lacks reliability and validity and is poorly constructed.

Other studies suggest that these national or cross-cultural differences in decision-making exist across entire societies. For example, Maris Martinsons has found that American, Japanese and Chinese business leaders each exhibit a distinctive national style of decision-making. The Myers-Briggs typology has been the subject of criticism regarding its poor psychometric properties. In the general decision-making style GDMS test developed by Suzanne Scott and Reginald Bruce, there are five decision-making styles: rational, intuitive, dependent, avoidant, and spontaneous.

In the examples below, the individual is working for a company and is offered a job from a different company. There are a few characteristics that differentiate organizational decision-making from individual decision-making as studied in lab experiments: [88]. Unlike most lab studies of individual decision-making, ambiguity is pervasive in organizations. There is often only ambiguous information, and there is ambiguity about preferences as well as about interpreting the history of decisions. Decision-making in and by organizations is embedded in a longitudinal context, meaning that participants in organizational decision-making are a part of ongoing processes.

Even if they don't take on active roles in all phases of decision-making, they are part of the Decision Process and its consequences. Decisions in organizations are made in a sequential manner, and commitment may be more important in such processes than judgmental accuracy. Incentives play an important role in organizational decision-making. Incentives, penalties, and their ramifications are real and may have long-lasting effects. These effects are intensified due to the longitudinal nature of decision-making in organizational settings. Incentives and penalties are very salient in organizations, and often they command managerial attention. Many executives, especially in middle management, may make repeated decisions on similar issues. Several repeated decisions are made by following rules rather than by using pure information processing modes.

Conflict is pervasive in organizational decision-making. Many times power considerations and agenda setting determine decisions rather than calculations based on the decision's parameters. The nature of authority relations may have a large impact on the way decisions are made in organizations, which are basically political systems. From Wikipedia, the free encyclopedia. This article is about decision making as analyzed in psychology. For a broader discipline, see Decision theory. Cognitive process resulting in choosing a course of actions. This section needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. July Learn how and when to remove this template message.

Main article: Analysis paralysis. Main article: Information overload. Main article: Decision fatigue. Main article: Emotions in decision-making. May Learn how and when to remove this template message. Main article: Maximization psychology. Main article: Dual process theory. Philosophy portal Psychology portal. Aboulomania Adaptive performance Agent economics Analytic hierarchy process Argument map Business decision mapping Choice architecture Choice modelling Concept driven strategy Decision downloading Decision fatigue Decision quality Decision-making unit Emotional choice theory Foresight psychology Framing social sciences Free will Idea networking Rational choice theory Robust decision.

The New Science of Management Decision. ISBN Complex problem solving: the European perspective. OCLC December S2CID Choices, values, and frames. Multi-criteria decision making methods: a comparative study. Applied optimization. Dordrecht, Netherlands: Kluwer Academic Publishers. ISSN PMID Unifying themes in complex systems. Berlin; New York: Springer. CiteSeerX In Sternberg, Robert J. The evolution of intelligence.

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