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9990 · 2.3.3

Mistakes in decision-making — practice questions

Practice and worked examples for 9990 Mistakes in decision-making. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A student paid £60 for a non-refundable concert ticket. On the day of the concert, they feel unwell. They estimate the pleasure they would get from the concert in their current state is only £20, while the discomfort and effort of attending would be a negative experience valued at -£40. From a rational economic perspective, should they go to the concert? Explain the role of the sunk cost fallacy in this decision.

Show solution outline

The rational decision should only consider future costs and benefits, not sunk costs.

Step 1: Identify the Sunk Cost The £60 paid for the ticket is a sunk cost. It is non-refundable and cannot be recovered, regardless of whether the student goes to the concert or stays home. Therefore, it should be ignored in the decision-making process.

Step 2: Calculate the Net Outcome of Going to the Concert We use the formula: Net Outcome = Future Benefits - Future Costs

  • Future Benefit (pleasure from concert) = +£20
  • Future Cost (discomfort of attending) = £40
  • Calculation: Net Outcome (Go) = £20 - £40 = -£20
  • Going to the concert results in a net negative outcome of -£20 in terms of well-being.

Step 3: Calculate the Net Outcome of Staying Home

  • Future Benefit = £0
  • Future Cost = £0
  • Calculation: Net Outcome (Stay Home) = £0 - £0 = £0

Step 4: Compare Outcomes and Make a Rational Decision

  • Net Outcome (Go) = -£20
  • Net Outcome (Stay Home) = £0
  • Comparing the two, £0 is better than -£20. Therefore, the rational decision is to stay home.

Conclusion & Sunk Cost Fallacy: The sunk cost fallacy would tempt the student to go to the concert to 'not waste the £60'. They might think, 'I've already paid, so I have to go.' This is irrational because going to the concert makes them worse off by £20 compared to staying home. The £60 is lost either way. Succumbing to the fallacy means choosing an option that leads to a further loss.

Worked example 2

An online retailer displays 'RRP £120 — now £59' on headphones. A customer who would not pay £80 buys them. A yoghurt labelled '95% fat-free' outsells identical yoghurt labelled '5% fat'. A shopper queues 40 minutes for a sale, saying 'I've waited this long, I have to buy something'. Identify the biases and evaluate whether consumers can protect themselves.

Show solution outline

Headphones — anchoring: £120 RRP sets high reference point → £59 feels like a bargain. Customer adjusts insufficiently from anchor — would reject at £80 without anchor (Tversky & Kahneman). Was/now pricing is standard retail tactic (2.4.2).

Yoghurt — framing: Identical product — '95% fat-free' (positive frame) preferred over '5% fat' (negative frame). Prospect theory — outcomes evaluated relative to reference point and frame.

Sale queue — sunk cost fallacy: 40 minutes invested → feels wasteful to leave empty-handed → purchase to justify wait, despite not needing items. Irrational — past time cannot be recovered.

Evaluate — why biases persist: Evolutionary efficiency — quick decisions often adequate (2.3.2 heuristics). Marketers deliberately exploit — anchoring, framing, scarcity (2.5.1) are industry standard.

Evaluate — protection strategies: Cooling-off periods, comparison shopping (break anchor), focus on absolute value not relative discount. Financial literacy education helps but bounded rationality limits full elimination. Regulation (e.g. truthful RRP claims) addresses some exploitation but not framing or sunk costs.

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