Cognitive Bias

What is the definition of the sunk cost fallacy?

• The tendency to continue an investment in money, effort, or time has been made

• The tendency to avoid risks to acquire gains

• The tendency to prefer avoiding losses over acquiring equivalent gains

• The tendency to take risks to avoid losses

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DOK Level 1: Recall

Which of the following is an example of the sunk cost fallacy?

• Continuing to watch a boring movie because you paid for the ticket

• Selling a stock at a loss to avoid further decline

• Donating money to a charity

• Saving money in a low-interest savings account

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DOK Level 1: Recall

How does the sunk cost fallacy influence economic decision-making?

• It leads to more risk-taking behavior

• It leads to more conservative financial decisions

• It encourages continued investment in unprofitable ventures

• It encourages people to spend more money

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DOK Level 2: Skill/Concept

Consider a scenario where a person has spent $100 on a concert ticket but feels sick on the day of the concert. According to the sunk cost fallacy, what are they more likely to do?

• Stay home and rest

• Go to the concert to avoid wasting the $100

• Sell the ticket at a loss

• Give the ticket to a friend

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DOK Level 2: Skill/Concept

Which of the following best illustrates the sunk cost fallacy in a real-world context?

• A person choosing to buy a lottery ticket

• A person refusing to abandon a failing business to avoid wasting prior investments

• A person investing in a new startup company

• A person saving money in a high-interest account

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DOK Level 2: Skill/Concept

What is the primary psychological reason behind the sunk cost fallacy?

• People are inherently risk-seeking

• People want to justify past investments

• People are indifferent to past investments

• People prefer immediate rewards over future rewards

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DOK Level 1: Recall

Which of the following scenarios best exemplifies someone falling into the sunk cost fallacy?

• Rachel, after noticing that her new shoes are uncomfortable and cause blisters, decides to continue wearing them because they were expensive.

• John, after losing money on a poor stock investment, decides to diversify his portfolio to mitigate future risks.

• Amy, after realizing that she bought a faulty laptop, decides to return it and get a refund.

• Michael, after seeing that the movie he is watching is not interesting, decides to leave the theater.

Loss aversion is the idea that...

• We tend to make investments that lose money

• We tend to avoid telling people about our losses

• If you lose money, you shouldn’t be in charge of making financial decisions

• We tend to feel the effect of losses more than the effect of similar gains

One way to overcome loss aversion is to…

• Avoid making a decision at all

• Reframe the situation so that you focus on the potential gains

• Ask a friend what they’d do and follow their example

• Think of the best case scenario and base your decision on how you feel

Cognitive Bias is

• when you search for, interpret and recall information that supports what you already believe

• when you can't stop buying things.

• a systematic error in thinking that leads to irrational decision making

• when you lose $20 it feels worse that when you find $20