Economics and introspection

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Stubbornness in decisions

Through the study of economics, we can make more profitable choices.

When applied to individual decisions, it helps to avoid misunderstandings, and bring us back to reality.

It helps us not to make stubborn decisions, and it shows us when we are making decisions without evaluating costs and benefits.

Stubborn investment decisions are likely in business; let’s make an example. I am an entrepreneur and I have invested a considerable amount of money in the production of a new car, which I will sell at a competitive price. I’ve already invested 90%, of my money, and I need to invest another 10%. But I hear that a competitor has just introduced another car with similar features at a much better price — a price that’s too low to compete with.

What should I do?

• I could complete my investment by spending the remaining 10% as planned. I say, “I have already invested 90% of my money!” and insist on making the investment. In doing so, I am not evaluating the costs and benefits of my decision. I risk bankruptcy; in fact, my competitor is making lower prices for a similar product.
• Alternatively, I can choose a different strategy for investing the remaining money. For example, I can retool the production line to make a different type of product.

Individual decisions to solve problems

Now let’s look at how ordinary people make stubborn, uncomfortable decisions.

I bought a movie ticket for Friday night. On Friday afternoon, a friend of mine invites me to a show. I’d rather go to the theater with him than go to the movies alone. What should I do? Since I spent money to buy the ticket — which is non-refundable — I want to avoid wasting my investment. So I decide to go to the movies by myself.

But if I don’t like going to the movies alone, why continue with a “bankruptcy” investment? I could make better use of my time by going to the theater with a friend to see a show I like. I am giving up this opportunity out of stubbornness.

Introspective economy reveals that people make misjudgments. It also shows whether there is an illusion of having made the right choice.

In the last example, is my goal to go to the movies, or is it to spend my free time with pleasure? The movie is just a means to a goal. Going to the movies would be unsatisfying because I don’t like it anymore.

Magalì Fia

This paper refers to the economic concept of “sunk costs” – In psychological applications, there is a concept of “sunk cost fallacy”

In this paper, I made a revision of this concept.