Ratan Tata faces the same problem that an average movie goer faces when the spouse has bought a ticket to a film that is really not worth watching. The money has been spent. Should that fact push you into another wrong decision—of watching a bad film rather than doing something better with your time? Or, can you really walk away after having spent good money?
The controversial Tata Motors plant at Singur is what economists would call a sunk cost—much like that movie ticket. It has been shown that most people let sunk costs prey on their mind. Subsequent decisions get affected. They feel they have to see the movie because money has been spent.
In that sense, Tata’s threat to pull out of Singur seems a brave one. One-third of the Rs1,500 crore spent for the new factory there may not be recovered. Has Tata been able to overcome the “sunk cost fallacy”? Much depends on whether Tata’s statement last week was the precursor to a tough decision or a bargaining chip to push West Bengal’s government into sorting out the Singur mess. And Tata will have to explain his decision to shareholders of Tata Motors as well.