Economic Fundamentals: Costs, Benefits, and Decision Errors

Decision Errors You Can Fix with Economic Reasoning

Many everyday decision traps come from using the wrong information at the wrong time. Economic reasoning helps you separate what is already done from what can still be changed, and it pushes you to compare the next best alternative using marginal costs and marginal benefits. This chapter focuses on three common traps: sunk costs, trade-offs under uncertainty, and decisions made with too little (or misused) information.

Sunk Costs: What They Are and Why They Should Not Drive Today’s Choice

What counts as a sunk cost

A sunk cost is a cost you have already paid (in money, time, or effort) that cannot be recovered no matter what you do next. Because it cannot be changed, it should not affect the decision you make now. The only relevant question is: given where I am right now, what choice has the best marginal trade-off going forward?

• Sunk money: a nonrefundable ticket, a past subscription fee, a deposit you cannot get back.
• Sunk time: hours already spent on a course or project.
• Sunk effort/emotion: stress endured, pride invested, “I’ve come this far.”

The sunk cost fallacy (the decision error)

The sunk cost fallacy happens when you keep investing in an option mainly because you have already invested in it. The logic sounds like: “If I stop now, all that past spending was wasted.” But the past spending is already gone; continuing can waste even more if the future marginal costs exceed the future marginal benefits.

How to restate a sunk-cost decision in marginal terms (step-by-step)

1. State the decision as a forward-looking choice: “Continue vs. stop” or “wait vs. leave” from this moment onward.
2. List future (marginal) benefits of continuing: what you gain if you proceed.
3. List future (marginal) costs of continuing: money, time, stress, lost alternatives.
4. Compare to the best alternative: what you would do instead with the same resources starting now.
5. Decide using only future differences: choose the option with higher net marginal benefit.

A quick self-check: if a stranger offered to “buy” your current position and put you back at the same decision point with the sunk cost erased, would you still choose to continue? If not, the sunk cost is driving you.

Scenario 1: Continuing a Subscription You Don’t Use

The trap

You pay $15/month for a streaming or app subscription. You barely use it, but you keep it because “I’ve paid for it for years” or “I might use it someday.” The past payments are sunk; they do not make the subscription more valuable today.

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Diagnose the error

• Wrong frame: “I should keep it to justify past payments.”
• Right frame: “From today forward, is the next month worth $15 compared to my alternatives?”

Restate the decision using marginal costs/benefits

Marginal cost of keeping (next month): $15 (plus attention/effort to manage it).
Marginal benefit of keeping (next month): expected enjoyment or usefulness from what you realistically will watch/use.

Practical step-by-step

1. Forecast realistic usage: look at last month’s actual hours used, not your intentions.
2. Translate usage into value: ask, “Would I pay $15 for that amount of use if I didn’t already have the subscription?”
3. Compare to alternatives: free options, a cheaper plan, renting only what you watch, or reallocating $15 to something you value more.
4. Choose a rule: “Cancel unless I used it at least X hours last month” or “Pause for 2 months and reassess.”

Notice how the rule depends on future use, not on how long you have been subscribed.

Scenario 2: Finishing a Project That’s Going Bad

The trap

You are halfway through a work project, a home renovation, or a personal course. New information suggests the payoff is smaller than expected or the remaining work is larger than expected. You keep going because “we’ve already spent so much” or “it would look bad to stop.”

Diagnose the error

• Wrong frame: “Stopping wastes what we already spent.”
• Right frame: “Given what remains, is continuing the best use of our next dollar/hour?”

Restate the decision using marginal costs/benefits

Marginal benefit of continuing: the additional value created by finishing from this point (not the total value of the whole project).
Marginal cost of continuing: remaining labor, remaining budget, delays to other priorities, risk of further overruns.

Practical step-by-step (a “continue/stop/pivot” checklist)

1. Freeze the sunk costs: write them down, then label them non-decision-relevant for today’s choice.
2. Estimate remaining requirements: time, cash, coordination, and stress from now to completion.
3. Estimate remaining payoff: what completion adds from today onward (revenue, learning, convenience, reputation).
4. Identify pivot options: scale down scope, change tools, outsource a piece, or stop and salvage partial value.
5. Choose based on the best forward-looking net benefit: continue only if the incremental payoff exceeds the incremental cost and beats the best alternative use of resources.

In organizations, sunk cost pressure often comes from incentives: managers may fear blame for stopping. A useful practice is to separate evaluation of the original decision (made with old information) from evaluation of the current decision (made with updated information). That reduces the incentive to “throw good resources after bad.”

Trade-Offs Under Uncertainty: Expected Outcomes Without Heavy Math

Why uncertainty changes how you compare options

Many choices involve uncertain outcomes: you might get a job offer, the line might move quickly, the project might succeed, the subscription might become useful. Under uncertainty, you still compare marginal costs and benefits, but benefits become expected benefits: what you anticipate on average given the chances of different outcomes.

Expected value as a practical idea (not a formula)

Think of an expected outcome as a weighted average: outcomes that are more likely should count more in your decision. You do not need precise probabilities to improve decisions; you need a disciplined way to avoid treating a low-probability upside as if it were guaranteed.

• High payoff, low chance: tempting, but often overvalued.
• Moderate payoff, high chance: often undervalued because it feels less exciting.

Step-by-step: making an uncertainty-aware choice

1. List the main possible outcomes: keep it to 2–4 scenarios (best case, typical case, worst case).
2. Assign rough likelihoods: use ranges if needed (e.g., “unlikely,” “about half,” “very likely”).
3. Estimate the payoff/cost in each scenario: money, time, stress, satisfaction.
4. Focus on what changes between options: compare differences, not totals.
5. Check for one-way doors vs. two-way doors: if you can reverse the decision cheaply, you can experiment; if not, demand stronger evidence.

The Role of Information: When to Pay for It and When to Stop Searching

Information has a cost

Information is valuable because it can change your choice and improve outcomes. But gathering information takes time, attention, and sometimes money. The key is to seek information up to the point where the marginal benefit of better information is no longer worth the marginal cost of acquiring it.

Common information mistakes

• Oversearching: spending hours to save a trivial amount or to reduce already-small uncertainty.
• Undersearching: making a big, hard-to-reverse decision with little evidence.
• Using irrelevant information: focusing on sunk costs, vanity metrics, or anecdotes that do not predict your outcome.

Step-by-step: deciding whether to gather more information

1. Ask: “What decision would this information change?” If it would not change your action, it is not worth much.
2. Estimate the swing: how much better could your choice become with the new info?
3. Estimate the cost: time, money, delay, and cognitive load.
4. Set a stopping rule: “I will compare 3 options,” “I will spend 30 minutes,” or “I will decide by Friday.”

Scenario 3: Waiting in a Long Line

The trap

You have already waited 25 minutes in a long line for a popular restaurant, customer service desk, or event entry. You learn there may be another 30 minutes left. Many people stay because “I’ve already waited so long.” That past waiting time is sunk.

Diagnose the error

• Wrong frame: “Leaving wastes my 25 minutes.”
• Right frame: “From now, is the expected benefit of staying worth the expected additional wait compared to my alternatives?”

Restate the decision using marginal costs/benefits

Marginal cost of staying: expected additional waiting time (plus discomfort, missed plans).
Marginal benefit of staying: expected enjoyment/value of the meal/service/event relative to the best alternative you could switch to now.

Practical step-by-step (with uncertainty and information)

1. Get a better estimate: ask staff for expected wait or observe the line’s speed for 3–5 minutes.
2. Create two alternatives: (A) stay, (B) switch (another restaurant, come back later, do an errand and return).
3. Use expected waiting time: if the wait could be 10 minutes or 40 minutes, treat the likely case as most important.
4. Value your time explicitly: what would you otherwise do with the next 30 minutes that you actually care about?
5. Decide based on the next 30 minutes, not the last 25: if staying no longer beats the alternative, switch.

Notice the role of information: a quick question or brief observation can reduce uncertainty enough to change the best choice. But if the staff cannot estimate and you have already spent time investigating, additional searching may not be worth it.

Quick Diagnostic Questions to Catch Yourself in the Moment

Mini-Practice: Rewrite the Decision in One Sentence

For each situation, write a single sentence that removes sunk costs and uses marginal language.

• Subscription: “For the next month, paying $___ is worth it only if I expect at least ___ of value compared to ___.”
• Project: “Given the remaining work of ___ and remaining cost of ___, continuing is best only if the additional payoff is at least ___ and beats ___.”
• Line: “From now, if the expected remaining wait is more than ___ minutes, I will ___ instead.”