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A Theory of Ex Post Rationalization

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  • Erik Eyster
  • Shengwu Li
  • Sarah Ridout

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.

Suggested Citation

  • Erik Eyster & Shengwu Li & Sarah Ridout, 2021. "A Theory of Ex Post Rationalization," Papers 2107.07491, arXiv.org, revised Mar 2022.
    • Handle: RePEc:arx:papers:2107.07491
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    File URL: http://arxiv.org/pdf/2107.07491
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    References listed on IDEAS

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    1. McCarthy, Anne M. & Schoorman, F. David & Cooper, Arnold C., 1993. "Reinvestment decisions by entrepreneurs: Rational decision-making or escalation of commitment?," Journal of Business Venturing, Elsevier, vol. 8(1), pages 9-24, January.
    2. R. Preston Mcafee & Hugo M. Mialon & Sue H. Mialon, 2010. "Do Sunk Costs Matter?," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 323-336, April.
    3. Philipp N. Herrmann & Dennis O. Kundisch & Mohammad S. Rahman, 2015. "Beating Irrationality: Does Delegating to IT Alleviate the Sunk Cost Effect?," Management Science, INFORMS, vol. 61(4), pages 831-850, April.
    4. Marcello Negrini & Arno Riedl & Matthias Wibral, 2020. "Still in Search of the Sunk Cost Bias," CESifo Working Paper Series 8623, CESifo.
    5. Armin Falk & Florian Zimmermann, 2018. "Information Processing and Commitment," Economic Journal, Royal Economic Society, vol. 128(613), pages 1983-2002, August.
    6. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
    7. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-1134, December.
    8. Todd Sarver, 2008. "Anticipating Regret: Why Fewer Options May Be Better," Econometrica, Econometric Society, vol. 76(2), pages 263-305, March.
    9. Matthew Rabin, 2013. "An Approach to Incorporating Psychology into Economics," American Economic Review, American Economic Association, vol. 103(3), pages 617-622, May.
    10. Yaron Azrieli & Christopher P. Chambers & Paul J. Healy, 2018. "Incentives in Experiments: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1472-1503.
    11. Nadine Ketel & Jona Linde & Hessel Oosterbeek & Bas Klaauw, 2016. "Tuition Fees and Sunk‐cost Effects," Economic Journal, Royal Economic Society, vol. 126(598), pages 2342-2362, December.
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    Cited by:

    1. Matthew G. Nagler, 2023. "Thoughts matter: a theory of motivated preference," Theory and Decision, Springer, vol. 94(2), pages 211-247, February.

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