The Application of Loss Aversion and Sunken Costs in Behavioral Economics: A Case Study

Abstract

This study investigates the application of behavioral economics concepts—loss aversion and the sunk cost fallacy—to contemporary digital and sustainable business models. These models increasingly take use of cognitive biases to increase profits, frequently at the expense of customer welfare. Through a multi-case study of TikTok's live commerce scarcity strategies, Netflix's auto-renewal subscriptions, and Patagonia's green premiums, the study analyzes how businesses strategically take advantage of these biases using theoretical frameworks from behavioral literature and Prospect Theory. Key findings show that TikTok uses artificial scarcity and time pressure to increase impulse purchases, taking advantage of the sunk costs of viewer attention; Netflix uses loss aversion (fear of losing personalized content) and sunk costs (justification of prior payments) to sustain "zombie subscriptions"; and Patagonia's eco-pricing unintentionally leads to moral licensing, where moral purchases justify subsequent unsustainable behaviors. The study emphasizes the two-pronged effects of such tactics: increasing profits at the expense of consumer remorse, monetary loss, and environmental tradeoffs. This work, which creatively connects traditional behavioral theories with modern business practices, suggests practical solutions, including consumer education, policy reforms, behavioral "nudges" (e.g., cooling-off periods, sunk cost visualizations), and transparency mandates (e.g., usage reminders for subscriptions, real-time inventory disclosures). These recommendations attempt to combine corporate profitability with ethical consumer protection, producing a balanced market ecology that mitigates irrational decision-making and encourages sustainable consumption.