I came up with example of how sunk cost fallacy could helps increase the income for 2 competing agents.
Consider two corporations that each sunk considerable sum of money into two interchangeable competing IP-heavy products. Digital cameras for example. They need to recover that cost, which they would be unable to if they start price-cutting each other while ignoring the sunk costs. If they both act as not to price cut beyond the point where the sunk costs are not recovered, they settle at a price that permits to recover the software development costs. If they ignore sunk costs they can price cut to point where they don’t recover development expenses. Effectively the fallacy results in a price-fixing behaviour.
Note: on the second thought, the digital cameras, being a luxury item, may be a poor choice for that example. Corporate goods, such as e.g. network hardware, may be a better choice. The luxury goods keep selling ok even if someone is price cutting you, as the luxuries attain some of the value from the price itself;
For ideal agents, absolutely. For things like humans… Have you looked at the models in “Do Sunk Costs Matter?”, McAfee et al 2007?
EDIT: I’ve incorporated all the relevant bits of McAfee now, and there are one or two other papers looking at sunk cost-like models where the behavior is useful or leads to better equilibria.
I came up with example of how sunk cost fallacy could helps increase the income for 2 competing agents.
Consider two corporations that each sunk considerable sum of money into two interchangeable competing IP-heavy products. Digital cameras for example. They need to recover that cost, which they would be unable to if they start price-cutting each other while ignoring the sunk costs. If they both act as not to price cut beyond the point where the sunk costs are not recovered, they settle at a price that permits to recover the software development costs. If they ignore sunk costs they can price cut to point where they don’t recover development expenses. Effectively the fallacy results in a price-fixing behaviour.
Note: on the second thought, the digital cameras, being a luxury item, may be a poor choice for that example. Corporate goods, such as e.g. network hardware, may be a better choice. The luxury goods keep selling ok even if someone is price cutting you, as the luxuries attain some of the value from the price itself;
There are better ways of making credible commitments than having a tendency to commit sunk cost fallacy.
For ideal agents, absolutely. For things like humans… Have you looked at the models in “Do Sunk Costs Matter?”, McAfee et al 2007?
EDIT: I’ve incorporated all the relevant bits of McAfee now, and there are one or two other papers looking at sunk cost-like models where the behavior is useful or leads to better equilibria.
While that may be true, I don’t see how it has any consequences.
Of course. But what works, works; you’d cripple an agent by dispelling it’s fallacies without providing alternatives.