Conceptual Tools

Opportunity Cost

The next best alternative that is given up while making a decision or choice.
Example: If I spend $10 buying a coffee, what are the other options that I could get other coffee? The opportunity cost of buying the coffee at a cafe could be a Donut or Hot Chocolate

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Sunk Cost

Costs that are incurred and cannot be recovered.

Sunk Cost Fallacy – Continuing an action that negatively affects you because you feel you need to "make your money’s worth."

Movie Example

• S pays for a ticket but realizes 30 minutes in that the movie is bad.
• If S stays, it won’t recover the cost or improve the experience.
• If S leaves, they avoid wasting time.
• But S decides to stay because they "paid for it" → Sunk Cost Fallacy.

Car Example

• If S is traveling to Goa:

  • Bus ticket: ₹1500.
  • Car costs: Higher, but Insurance and Interest are Sunk Costs (already paid and cannot be recovered).

  

  • According to these calculations, taking the car costs more. BUT Insurance and Interest are SUNK COSTS. Insurance and Interest are already paid and cannot be recovered by not driving the car, hence should be ignored.