A Theory of Ex Post Rationalization
Erik Eyster, Shengwu Li, and Sarah Ridout
TL;DR
This paper develops a formal theory explaining how individuals rationalize past choices, including mistakes, and predicts that sunk costs influence future decisions, supported by choice behavior analysis.
Contribution
It introduces a novel formal model of ex post rationalization that links sunk costs to subsequent choices with tractable comparative statics.
Findings
Sunk costs impact later decision-making.
Choice behavior can identify model primitives.
The model provides clear comparative statics.
Abstract
People rationalize their past choices, even those that were mistakes in hindsight. We propose a formal theory of this behavior. The theory predicts that sunk costs affect later choices. Its model primitives are identified by choice behavior and it yields tractable comparative statics.
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Taxonomy
TopicsDecision-Making and Behavioral Economics · Economic Theory and Institutions · Game Theory and Applications