Sunk cost
Also known as: retrospective cost · retrospective costs · sunk costs
- 1Defined as an unrecoverable cost already incurred.
- 2Contrasts with prospective costs that are avoidable.
- 3Considered irrelevant to rational future decision-making.
- 4Often leads to irrational persistence in everyday life.
- 5Commonly observed in maintenance and repair scenarios.
In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered.
Connections1
distinction from opportunity cost
Unlike opportunity cost, which is forward-looking and considers future alternatives, sunk costs are past expenditures that should not influence rational future decisions.
A sunk cost is an expenditure that has already occurred and cannot be recovered, regardless of future outcomes. In the context of rational decision-making, economists argue that these costs should be ignored because they are irrelevant to future choices. Prospective costs, which are avoidable through current actions, are the only factors that should influence future strategy.
The psychology of the cognitive bias offers a set of "need to act fast" biases (light green) that affect rationality in economics. [click twice to browse].Wikimedia Commons: File:Cognitive_bias_codex_en.svgThe sunk cost fallacy has also been called the " Concorde fallacy": the British and French governments took their past expenses on the costly supersonic jet as a rationale for continuing the project, as opposed to "cutting their losses".Wikimedia Commons: File:Concorde_216_(G-BOAF)_last_flight.jpg Despite the theoretical consensus, individuals often struggle to disregard past investments when making decisions about ongoing projects. This behavior is frequently observed in personal scenarios, such as the continued repair of a car or house, where the desire to justify previous spending leads to irrational persistence. Recognizing sunk costs is a critical step in avoiding the trap of letting past expenditures dictate future logic.