The Lingering Effects of Our Past Experiences: The Sunk-Cost Fallacy and the Inaction-Inertia Effect

Abstract

The effect of past experiences and actions in shaping current perceptions, emotions, decisions and goals is widely recognized in the psychological literature. When it comes to economic decisions, however, these influences are sometimes seen as impediments to rational decision-making. In an attempt to explore the enduring consequences of the past, we present, compare, and discuss two familiar behavioral phenomena: The sunk-cost effect, which refers to situations where continued actions are fueled by past investments, and the inaction-inertia effect, in which continued inaction is triggered by the shadows of missed opportunities. Although one process elicits continued action and the other continued inaction, we show that there is a great deal of similarity in the psychological underpinnings of these effects, and argue that respecting sunk costs and avoiding actions that are associated with forgone opportunities are not necessarily unreasonable, or maladaptive behaviors.