The sunk cost fallacy occurs when individuals or organizations continue to invest time, resources, or effort into a project or endeavor simply because they have already invested a significant amount. This fallacy suggests that decisions should be based on future prospects rather than being driven by past investments.
Sunk cost refers to the costs that have already been incurred and cannot be recovered, regardless of future actions or decisions. These costs are essentially in the past and should not be considered when making current or future decisions. The concept of sunk cost is important in various fields, including economics, business, and decision-making.
Key aspects:
Past Decisions: Sunk costs are a result of past decisions or actions, such as money spent on a failed project, equipment purchased for an abandoned venture, or training expenses for an employee who has left the company.
Irretrievable Expenses: Sunk costs are expenses that have already been paid or invested and cannot be recovered, regardless of the decision taken in the future. These costs are "sunk" because they are beyond retrieval.
Decision-Making Considerations: When making decisions, it is important to avoid considering sunk costs. Rational decision-making should be based on the prospective costs and benefits of future actions, rather than being influenced by past expenses that cannot be changed.
Opportunity Costs: Instead of focusing on sunk costs, it is important to consider opportunity costs. Opportunity cost refers to the potential benefits or opportunities foregone by choosing one alternative over another. By considering opportunity costs, decision-makers can evaluate the potential benefits of different options going forward.