One of the most common arguments at home is around small portions of food that remain after dinner. Too little to store; and too precious to throw. No amount of pleading to eat up the last few bits works with the family. Many of us women will blame this syndrome for the few pounds we gain from routinely eating the leftovers. Young mothers will testify that they know how bland baby foods taste. Sunk cost fallacy is the name behavioural scientists give this problem.In rational decision making, past costs should not matter. When something does not change while making a decision, it should not be relevant to that decision. Since the food has been already cooked, and since that fact cannot be modified based on whether it is eaten or not, eating those last few mouthfuls should be an independent decision. Eating just because it has been cooked already, is a sunk cost fallacy. However, we are unable to view it like that.Consider the unfinished apartments dotting Mumbai. The money that has been sunk into them is a decision of the past. More money is needed to complete them, and some of the builders have run out of money and are unable to raise more funds. The money that is locked into these buildings can be released only if these flats are sold at prices much lower than at what they were first acquired. Sunk cost fallacy comes into play.The earlier buyers of the flats would be locked into the price that they paid. They are investors who bought the flats assuming that they would make money from the price appreciation. To sell at a loss would mean they now have to close the investment with regret. Loss aversion is the most common way in which sunk cost fallacy manifests.The investment they made is sunk and in the past. The price at which they can sell the flat is determined by the current market conditions. If there are no buyers, and if there are too many properties that are incomplete and looking for funds, the locked money can be unleashed only by a fall in price. If investors, cartels, and musclemen operate on the basis of the price they paid in the past, and refuse to allow any sale of the flats at a price that would mean a loss for them, these buildings will remain incomplete and become dilapidated with time.Loss aversion also manifests in the stock market when we place too much importance on the price at which we bought a stock. Assume we bought a stock at Rs 20 and expected it to appreciate to Rs 40. The stock quickly races to that level. We will now assume that we grossly underestimated its potential and therefore, will not sell the stock. We will gleefully watch it zoom to say Rs 100.We are very happy to tell the story about how we discovered a hidden gem and how it is working for us. We never fail to mention our purchase price of Rs 20 as we are anchored mentally to that number. Those who are still on the fringe wondering if they should buy at Rs 100 or not, will be envious of us.Then the stock price begins to fall. We will discount the first few rupees of fall. We may begin to worry when the price reaches say Rs 60. But we will convince ourselves that we are still making a profit , and continue to remain invested. Then the stock reaches Rs 30. At this point, we begin to believe that the stock will bounce back once it reaches Rs 20, our purchase price. Our anchoring is so deep, that we believe that the entire market will respect that number.The stock, however, lets us down and falls to Rs 10. We are now at a loss. However, we hope for the price to somehow come back to Rs 20, so we can get out without a loss. This is how dud stocks become long-term investments in our portfolio.The price at which we bought something is relevant at that point in time. We evaluate it for its worth when we make the decision. Once the decision has been made, and the money has been paid, it is of no relevance to any future decisions we may make. We can allocate it over time; we can hope to recover it over the years; we can compute how to expense it; we can compare it with our other decisions. But money once spent is done and gone, and whatever we may do in the future will not alter that fact.Our difficulty in coming to terms with this rationality is not only due to our aversion for loss and regret. It also arises from ideas of personal responsibility and avoidance of wastage. Throwing food into the drain seems an irresponsible thing to do. That is how the fridge holds tiny boxes of food, hopefully to be consumed at another meal. The nagging responsibility of cooking what is just needed, and the inability to estimate it right at every meal is a problem many of us cannot solve satisfactorily.A far worse manifestation of this behavior is our tendency to throw good money after bad; or fail to recognise the opportunity costs. We would endure a poor film, since we had paid for the ticket. Walking out midway might lead to a more efficient and joyful utilisation of the time spent instead. Many investors are known to average down, buying into stocks whose prices are falling, assuming that it lowers their purchase price. They are wasting good money that could go into another stock, by investing in a stock that is already falling.Sunk cost fallacy is put up as a poster example of how we do not decide rationally. Our behaviour is not driven by logic, but by our notion of loss and gain, where we include variables that should not matter to the decision on hand. The money we recover from a losing stock can be invested in another opportunity; the money released from the incomplete building project can be put to work elsewhere; and the food that did not get popped into the mouth could save much regret about innocuous overeating. We remain limited by our inability to decide rationally.(The writer is Chairperson, Centre for Investment Education and Learning)