Loss Aversion vs Sunk Cost Fallacy
Loss Aversion and Sunk Cost Fallacy are two Behavioral Economics concepts in AP Economics that students often mix up. In short: loss aversion is loss aversion is the tendency to feel the pain of a loss more strongly than the pleasure of an equal-sized gain. Meanwhile, sunk cost fallacy is the sunk cost fallacy is continuing an endeavor because of money or effort already spent, even when it is no longer worthwhile. Here is how they compare side by side.
Loss aversion is the tendency to feel the pain of a loss more strongly than the pleasure of an equal-sized gain.
Roughly, losing $100 hurts about twice as much as gaining $100 feels good. It helps explain why people hold losing investments too long and are reluctant to take fair gambles. It is a core idea in prospect theory.
The sunk cost fallacy is continuing an endeavor because of money or effort already spent, even when it is no longer worthwhile.
Rational decisions should ignore sunk costs (which can't be recovered) and weigh only future costs and benefits. People fall into this trap because of loss aversion and a reluctance to 'waste' past investment.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime.