Small observation of mine. While watching out for sunk cost fallacy it’s easy to go to far and assume that making the same spending is the rational thing. Imagine you bought TV and the way home you dropped it and it’s destroyed beyond repair. Should you just go buy the same TV as the cost is sunk? Not neccesarily—when you were buying the TV the first time, you were richer by the price of the TV. Since you are now poorer, spending this much money might not be optimal for you.
In practice, trying to fit many observed instances to to a curved utility-money curve will result in an implausibly sharp curve. So unless the TV purchase amounts to a large chunk of your income, this probably won’t match the behavior.
Rabin has a nice example of this for risk aversion, showing that someone who wasn’t happy taking a −100:110 coin flip due to a utility-money curve would have an irrationally large risk aversion for larger amounts.
If the price of the TV is a small enough fraction of your wealth and there isn’t any special circumstance that makes your utility depend in a weird way on wealth (e.g., there’s a competition this weekend that you want to enter, it’s only open to people who can demonstrate that their net wealth is at least $1M, and your net wealth is very close to $1M), then your decision to buy the TV shouldn’t be altered by having lost it.
Some TVs are quite expensive and most people aren’t very wealthy, so this particular case might well be one in which being one TV’s cost poorer really should change your decision.
Small observation of mine. While watching out for sunk cost fallacy it’s easy to go to far and assume that making the same spending is the rational thing. Imagine you bought TV and the way home you dropped it and it’s destroyed beyond repair. Should you just go buy the same TV as the cost is sunk? Not neccesarily—when you were buying the TV the first time, you were richer by the price of the TV. Since you are now poorer, spending this much money might not be optimal for you.
In principle, absolutely.
In practice, trying to fit many observed instances to to a curved utility-money curve will result in an implausibly sharp curve. So unless the TV purchase amounts to a large chunk of your income, this probably won’t match the behavior.
Rabin has a nice example of this for risk aversion, showing that someone who wasn’t happy taking a −100:110 coin flip due to a utility-money curve would have an irrationally large risk aversion for larger amounts.
If the price of the TV is a small enough fraction of your wealth and there isn’t any special circumstance that makes your utility depend in a weird way on wealth (e.g., there’s a competition this weekend that you want to enter, it’s only open to people who can demonstrate that their net wealth is at least $1M, and your net wealth is very close to $1M), then your decision to buy the TV shouldn’t be altered by having lost it.
Some TVs are quite expensive and most people aren’t very wealthy, so this particular case might well be one in which being one TV’s cost poorer really should change your decision.
[EDITED to fix a trivial typo.]