Game theory has been the subject of many recent discussions I’ve had with curious college students, aspiring economists, and adults alike. In general, the core concept is quite simple and boils down to a basic question: given a certain situation, what is your best response to another party’s action(s), assuming all actors are rational? Or, in other words, what reaction yields the recipient the highest possible utility (a measure of one’s satisfaction)?
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The Voice Of Reason
Despite being one of the most basic ideas of microeconomics, “sunk costs” are deceptively easy to understand; yet, they lead even the most rational people to make irrational decisions. The basic idea of a sunk cost is quite simple: once a cost has been incurred, it should have no bearing on future decisions (it is “sunk”). The classic example of this phenomenon is the advance purchase of a movie ticket for which one cannot receive a refund.
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