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Sunk cost

In economics and business decision-making, a sunk cost (also known as retrospective cost) is a cost that has already been incurred and cannot be recovered. Sunk costs are contrasted with prospective costs, which are future costs that may be avoided if action is taken. In other words, a sunk cost is a sum paid in the past that is no longer relevant to decisions about the future. Even though economists argue that sunk costs are no longer relevant to future rational decision-making, people in everyday life often take previous expenditures in situations, such as repairing a car or house, into their future decisions regarding those properties.

Bygones principle
According to classical economics and standard microeconomic theory, only prospective (future) costs are relevant to a rational decision. At any moment in time, the best thing to do depends only on current alternatives. The only things that matter are the future consequences. Past mistakes are irrelevant. Any costs incurred prior to making the decision have already been incurred no matter what decision is made. They may be described as "water under the bridge", and making decisions on their basis may be described as "crying over spilt milk". In other words, people should not let sunk costs influence their decisions; sunk costs are irrelevant to rational decisions. Thus, if a new factory was originally projected to cost $100 million, and yield $120 million in value, and after $30 million is spent on it the value projection falls to $65 million, the company should abandon the project rather than spending an additional $70 million to complete it. Conversely, if the value projection falls to $75 million, the company, as a rational actor, should continue the project. This is known as the bygones principle or the marginal principle.

The bygones principle is grounded in the branch of normative decision theory known as rational choice theory, particularly in expected utility hypothesis. Expected utility theory relies on a property known as cancellation, which says that it is rational in decision-making to disregard (cancel) any state of the world that yields the same outcome regardless of one's choice. Past decisions—including sunk costs—meet that criterion.

The bygones principle can also be formalised as the notion of "separability". Separability requires agents to take decisions by comparing the available options in eventualities that can still occur, uninfluenced by how the current situation was reached or by eventualities that are precluded by that history. In the language of decision trees, it requires the agent's choice at a particular choice node to be independent of unreachable parts of the tree. This formulation makes clear how central the principle is to standard economic theory by, for example, founding the folding-back algorithm for individual sequential decisions and game-theoretical concepts such as sub-game perfection.

Until a decision-maker irreversibly commits resources, the prospective cost is an avoidable future cost and is properly included in any decision-making process. For instance, if someone is considering pre-ordering movie tickets, but has not actually purchased them yet, the cost remains avoidable.

Both retrospective and prospective costs could be either fixed costs (continuous for as long as the business is operating and unaffected by output volume) or variable costs (dependent on volume). However, many economists consider it a mistake to classify sunk costs as "fixed" or "variable". For example, if a firm sinks $400 million on an enterprise software installation, that cost is "sunk" because it was a one-time expense and cannot be recovered once spent. A "fixed" cost would be monthly payments made as part of a service contract or licensing deal with the company that set up the software. The upfront irretrievable payment for the installation should not be deemed a "fixed" cost, with its cost spread out over time. Sunk costs should be kept separate. The "variable costs" for this project might include data centre power usage, for example.

There are cases in which taking sunk costs into account in decision-making, violating the bygones principle, is rational. For example, for a manager who wishes to be perceived as persevering in the face of adversity, or to avoid blame for earlier mistakes, it may be rational to persist with a project for personal reasons even if it is not the benefit of their company. Or, if they hold private information about the undesirability of abandoning a project, it is fully rational to persist with a project that outsiders think displays the fallacy of sunk cost.

Fallacy effect
The bygones principle does not always accord with real-world behavior. Sunk costs often influence people's decisions, with people believing that investments (i.e., sunk costs) justify further expenditures. People demonstrate "a greater tendency to continue an endeavor once an investment in money, effort, or time has been made". This is the sunk cost fallacy, and such behavior may be described as "throwing good money after bad", while refusing to succumb to what may be described as "cutting one's losses". People can remain in failing relationships because they "have already invested too much to leave". Other people are swayed by arguments that a war must continue because lives will have been sacrificed in vain unless victory is achieved. Individuals caught up in psychologically manipulative scams will continue investing time, money and emotional energy into the project, despite doubts or suspicions that something is not right. These types of behaviour do not seem to accord with rational choice theory and are often classified as behavioural errors.

Rego, Arantes, and Magalhães point out that the sunk cost effect exists in committed relationships. They devised two experiments, one of which showed that people in a relationship which they had invested money and effort in were more likely to keep that relationship going than end it; and in the second experiment, while people are in a relationship which they had invested enough time in, they tended to devote more time to the relationship. It also means people fall into the sunk cost fallacy. Although people should ignore sunk costs and make rational decisions when planning for the future, time, money, and effort often make people continue to maintain this relationship, which is equivalent to continuing to invest in failed projects.

According to evidence reported by De Bondt and Makhija (1988), managers of many utility companies in the United States have been overly reluctant to terminate economically unviable nuclear plant projects. In the 1960s, the nuclear power industry promised "energy too cheap to meter". Nuclear power lost public support in the 1970s and 1980s, when public service commissions around the nation ordered prudency reviews. From these reviews, De Bondt and Makhija find evidence that the commissions denied many utility companies even partial recovery of nuclear construction costs on the grounds that they had been mismanaging the nuclear construction projects in ways consistent with throwing good money after bad.

There is also evidence of government representatives failing to ignore sunk costs. The term "Concorde fallacy" derives from the fact that the British and French governments continued to fund the joint development of the costly Concorde supersonic airplane even after it became apparent that there was no longer an economic case for the aircraft. The British government privately regarded the project as a commercial disaster that should never have been started. Political and legal issues made it impossible for either government to pull out.

The idea of sunk costs is often employed when analyzing business decisions. A common example of a sunk cost for a business is the promotion of a brand name. This type of marketing incurs costs that cannot normally be recovered. It is not typically possible to later "demote" one's brand names in exchange for cash. A second example is research and development (R&D) costs. Once spent, such costs are sunk and should have no effect on future pricing decisions. A pharmaceutical company's attempt to justify high prices because of the need to recoup R&D expenses would be fallacious. The company would charge a high price whether R&D cost one dollar or one million. R&D costs and the ability to recoup those costs are a factor in deciding whether to spend the money on R&D in the first place.

Dijkstra and Hong proposed that part of a person's behavior is influenced by a person's current emotions. Their experiments showed that emotional responses benefit from the sunk cost fallacy. Negative influences lead to the sunk cost fallacy. For example, anxious people face the stress brought about by the sunk cost fallacy. When stressed, they are more motivated to invest in failed projects rather than take additional approaches. Their report shows that the sunk cost fallacy will have a greater impact on people under high load conditions and people's psychological state and external environment will be the key influencing factors.

The sunk cost effect may cause cost overrun. In business, an example of sunk costs may be an investment into a factory or research that now has a lower value or none. For example, $20 million has been spent on building a power plant; the value now is zero because it is incomplete (and no sale or recovery is feasible). The plant can be completed for an additional $10 million or abandoned and a different but equally valuable facility built for $5 million. Abandonment and construction of the alternative facility is the more rational decision, even though it represents a total loss of the original expenditure—the original sum invested is a sunk cost. If decision-makers are irrational or have the "wrong" (different) incentives, the completion of the project may be chosen. For example, politicians or managers may have more incentive to avoid the appearance of a total loss. In practice, there is considerable ambiguity and uncertainty in such cases, and decisions may in retrospect appear irrational that were, at the time, reasonable to the economic actors involved and in the context of their incentives. A decision-maker might make rational decisions according to their incentives, outside of efficiency or profitability. This is considered to be an incentive problem and is distinct from a sunk cost problem. Some research has also noted circumstances where the sunk cost effect is reversed; that is, where individuals appear irrationally eager to write off earlier investments in order to take up a new endeavor.

Plan continuation bias
A related phenomenon is plan continuation bias,   which is recognised as a subtle cognitive bias that tends to force the continuation of a plan or course of action even in the face of changing conditions. In the field of aerospace it has been recognised as a significant causal factor in accidents, with a 2004 NASA study finding that in 9 out of the 19 accidents studied, aircrew exhibited this behavioural bias.

This is a hazard for ships' captains or aircraft pilots who may stick to a planned course even when it is leading to fatal disaster and they should abort instead. A famous example is the Torrey Canyon oil spill in which a tanker ran aground when its captain persisted with a risky course rather than accepting a delay. It has been a factor in numerous air crashes and an analysis of 279 approach and landing accidents (ALAs) found that it was the fourth most common cause, occurring in 11% of cases. Another analysis of 76 accidents found that it was a contributory factor in 42% of cases.

There are also two predominant factors that characterise the bias. The first is an overly optimistic estimate of probability of success, possibly to reduce cognitive dissonance having made a decision. The second is that of personal responsibility: when you are personally accountable, it is difficult for you to admit that you were wrong.

Projects often suffer cost overruns and delays due to the planning fallacy and related factors including excessive optimism, an unwillingness to admit failure, groupthink and aversion to loss of sunk costs.

Psychological factors
Evidence from behavioral economics suggests that there are at least four specific psychological factors underlying the sunk cost effect:

 * Framing effects, a cognitive bias where people decide on options based on whether the options are presented with positive or negative connotations; e.g. as a loss or as a gain. People tend to avoid risk when a positive frame is presented but seek risks when a negative frame is presented.
 * An overoptimistic probability bias, whereby after an investment the evaluation of one's investment-reaping dividends is increased.
 * The requisite of personal responsibility. Sunk cost appears to operate chiefly in those who feel a personal responsibility for the investments that are to be viewed as a sunk cost.
 * The desire not to appear wasteful—"One reason why people may wish to throw good money after bad is that to stop investing would constitute an admission that the prior money was wasted."

Taken together, these results suggest that the sunk cost effect may reflect non-standard measures of utility, which is ultimately subjective and unique to the individual.

Framing effect
The framing effect which underlies the sunk cost effect builds upon the concept of extensionality where the outcome is the same regardless of how the information is framed. This is in contradiction to the concept of intentionality, which is concerned with whether the presentation of information changes the situation in question.

Take two mathematical functions:

While these functions are framed differently, regardless of the input 'x', the outcome is analytically equivalent. Therefore, if a rational decision maker were to choose between these two functions, the likelihood of each function being chosen should be the same. However, a framing effect places unequal biases towards preferences that are otherwise equal.

The most common type of framing effect was theorised in Kahneman & Tversky, 1979 in the form of valence framing effects. This form of framing signifies types of framing. The first type can be considered positive where the 'sure thing' option highlights the positivity whereas if it is negative, the 'sure thing' option highlights the negativity, while both being analytically identical. For example, saving 200 people from a sinking ship of 600 is equivalent to letting 400 people drown. The former framing type is positive and the latter is negative.

Ellingsen, Johannesson, Möllerström and Munkammar have categorised framing effects in a social and economic orientation into three broad classes of theories. Firstly, the framing of options presented can affect internalised social norms or social preferences - this is called variable sociality hypothesis. Secondly, the social image hypothesis suggests that the frame in which the options are presented will affect the way the decision maker is viewed and will in turn affect their behaviour. Lastly, the frame may affect the expectations that people have about each other's behaviour and will in turn affect their own behaviour.

Overoptimistic probability bias
In 1968, Knox and Inkster approached 141 horse bettors: 72 of the people had just finished placing a $2.00 bet within the past 30 seconds, and 69 people were about to place a $2.00 bet in the next 30 seconds. Their hypothesis was that people who had just committed themselves to a course of action (betting $2.00) would reduce post-decision dissonance by believing more strongly than ever that they had picked a winner. Knox and Inkster asked the bettors to rate their horse's chances of winning on a 7-point scale. What they found was that people who were about to place a bet rated the chance that their horse would win at an average of 3.48 which corresponded to a "fair chance of winning" whereas people who had just finished betting gave an average rating of 4.81 which corresponded to a "good chance of winning". Their hypothesis was confirmed: after making a $2.00 commitment, people became more confident their bet would pay off. Knox and Inkster performed an ancillary test on the patrons of the horses themselves and managed (after normalization) to repeat their finding almost identically. Other researchers have also found evidence of inflated probability estimations.

Sense of personal responsibility
In a study of 96 business students, Staw and Fox gave the subjects a choice between making an R&D investment either in an underperforming company department, or in other sections of the hypothetical company. Staw and Fox divided the participants into two groups: a low responsibility condition and a high responsibility condition. In the high responsibility condition, the participants were told that they, as manager, had made an earlier, disappointing R&D investment. In the low responsibility condition, subjects were told that a former manager had made a previous R&D investment in the underperforming division and were given the same profit data as the other group. In both cases, subjects were then asked to make a new $20 million investment. There was a significant interaction between assumed responsibility and average investment, with the high responsibility condition averaging $12.97 million and the low condition averaging $9.43 million. Similar results have been obtained in other studies.

Desire not to appear wasteful
A ticket buyer who purchases a ticket in advance to an event they eventually turn out not to enjoy makes a semi-public commitment to watching it. To leave early is to make this lapse of judgment manifest to strangers, an appearance they might otherwise choose to avoid. As well, the person may not want to leave the event because they have already paid, so they may feel that leaving would waste their expenditure. Alternatively, they may take a sense of pride in having recognised the opportunity cost of the alternative use of time.

title: Sunk cost


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Talk:Sunk cost

Magnitude of loss aversion
I'm sure there are studies, either in economics or in psychology, which seek to quantify the degree to which people are "waste-averse". It might be interesting to cover some of those results. -- Ryguasu
 * The page on Loss aversion (linked from the article) says that people are about twice as averse to a loss as attracted to gains. Josh Parris # 06:46, 27 October 2005 (UTC)

 * For example, when you pre-order a movie ticket, the price of the ticket becomes a sunk cost. Even if you decide that you'd rather not go to the movie, there is no way to get back the money you originally paid and you have a sunk cost on your hands. This assumes, of course, that you can't simply return the movie ticket for a refund, and that you can't resell the ticket.

...Both of which, you usually can, making this a particularly poor example.

Too much Second Person
Use of the second person ("you") is generally discouraged as per Manual_of_Style. Ewlyahoocom 17:02, 31 January 2006 (UTC)

 * Mischief Managed Brian Sayrs 00:31, 15 April 2006 (UTC)

Omission: bottom line often entails a loss.
In addition to the sunk cost, there are usually more costs associated with sticking to the original plan. In the example of the movie ticket, the buyer would still incur some expense in getting to the movie theater, and might pay a lot more money for a soda than he would have had he stayed home. Therefore, not only is the bottom line theoretically unaffected by seeing through with the decision, but it usually is entails a loss.(edited to correct spelling of omission)

Omission: terminology
The terminology often used to explain the effect of the sunk cost contains the words "Bottom Line." Meaning the bottom line is the same whether or not the person chooses to actually go, therefore the cost should not be part of the decision.

Also, the language used to explain the emotional side of the argument usually contains the terms: "retroactive" and "legitimize." Thus the person who considers going even though he no longer wants to does so in order in an attempt to emotionally "retroactively legitimize" the poor decision to buy the ticket in the first place.(ditto omission)

Omission: the role of ambiguity
There is a set of studies showing how the sunk cost effect is due to the ambiguity of the situation rather than some irrational reasons. Ambiguity allows to interpret a situation in a way that is consistent with the continuation of an investment. In fact the consideration of a failed investment as affected by the sunk cost is often made ex-post that is after the results have appeared. This latter judgment about a seemingly fallacious situation is considered itself as retrospective fallacy.(ditto omission and ambiguity)

Not all investments are (typical) sunk costs
I think that one problem with the article is that it equates all investments with sunk costs. In the example with the ticket someone has bought for a movie that he doesn't want to see, the costs of the ticket are indeed not recoverable. They are sunk costs.

But in case of Elia Kazan's films most of the money for most of his films the studios invested in could be recovered. Sure, he used the "point of no return" tactic to trick the studios into investing even more money. But those weren't really sunk costs. They could be recovered.

It is important to make this distinction, as in the case of the cinema ticket the economically sound decision is to just throw the ticket away. Otherwise more money is spent on something that was a failure in the first place. But in the case of the Elia Kazan films it actually made sense to spend more money to finish the film and recover costs by getting the film into the cinemas.

This distinction is also important for pricing decisions: For example, if a company has made a really bad investment into a failed first attempt to develop a product, but succeeded to develop it in a second try, it is wrong to calculate the product's price on the base of the full cost of all the investments that went into the product. The costs for the failed first try do not belong to the product.

A competitor who got things right with just one try would easily undercut that price, and the product might be a failure in the market just because it is overpriced. Which then would mean that the costs for the second development effort would be sunk costs as well.

But it is also wrong to completely ignore investment costs in product pricing because asking for a price that is significantly higher than the variable costs is the only possibility one has to recover investment costs. --84.149.171.40 01:04, 28 August 2006 (UTC)

 * It seems to me that the Elia Kazan story is a perfectly good example of sunk costs. The studio can't sell back the exposed film or demand that the actors and techs return their salaries.  Completing the film and distributing it for a profit does not recover the sunk costs--it generates new revenue.  Economically, the sunk costs subtract from the total costs of completing the movie, which improves the ratio of future costs to anticipated revenue.  But if the future cost/benefit ratio is still poor compared to other competing projects (for which all costs are future costs), a rational studio exec should abandon the project.

 * Also, both product development efforts are legitimate costs of the product, and if I were pricing a product based only on development costs I would certainly count the first, failed effort as well as the second one. If a competitor enters the market, my pricing will have to adjust to be competitive, but that has nothing to do with my development costs.

 * You seem to be confusing the term "sunk cost" with "total loss"; sunk costs are often recouped when a project is completed; the term just describes those costs which cannot be recovered simply, such as by returning unsold inventory. --209.6.25.155 04:44, 10 May 2007 (UTC)

When determining sunk costs, one has to define what to include when determining what the question should be. If one buys a ticket to go see a movie, only the first part is a monetary one, hence 'sunk costs'. Deciding whether using the time lost at the movie for other endeavors would be more monetarily beneficial is the decision in question.The movie making example is closer to building a factory. A factory has to be built first to make money second. $20 million already invested - $10 million to complete, but can make another one for $5 million it is clear which choice to make. A movie has to be completed to make money. Now whether making a new movie from scratch would be a better choice, would depend on the cost of making a second movie. Marketing of the first movie would already have begun as well as anticipation already generated from expecting the movie to be completed. Not to mention controversy about cost overruns makes for great publicity. Would making a second movie make more money than finishing the first. One wouldn't make a second factory for another $20 million if the first one could be finished with another $10 million. The examples given do not determine the ability to recoup costs as part of sunk costs but more so to the accuracy of the choice in question. One cannot recoup the cost of spending money on a movie ticket..deciding if it is worth going to said movie is the choice. The sunk costs should not interfere with the choice involved. The spent x dollars on movie A so far. New decision now. Can they make more dollars from making movie B at cost z or make more from movie A of new cost y not including cost x so far.

Sunk cost fallacy and War
How else can you explain the troop buildups in Vietnam and now Iraq? Just because you bought the ticket to the wrong movie doesn't mean you have to go... 12.41.40.20 21:26, 11 January 2007 (UTC)

The author seems to neglect fixed costs, that are also opposed to variable costs but different from sunk costs. —The preceding unsigned comment was added by 84.56.2.66 (talk • contribs).

Merge from bygones principle to here
Please look at the information in Bygones principle and see if you think it should be merged here. The merge from Bygones principle was actually suggested on that page in 2006. --SueHay 01:33, 10 March 2007 (UTC)

 * They seem to be similar enough to support a merge to me at least. --86.128.255.115 13:51, 5 June 2007 (UTC)

If only to make it easier for the search engine to find the page, this page should have the phrase "throwing good money after bad" somewhere on it. It's a colloquial form often used in actual boardrooms :) —Preceding unsigned comment added by 81.226.53.31 (talk) 12:11, 15 October 2007 (UTC)

Huge Error
There is a fundamental fallacy in the article. It directly compares two projects, one costing $30 million and another one costing $5 million and claims that it is "obviously" rational to choose the latter at the $20 million mark, completely failing to consider anything but the cost - namely the fact that a $5 million plant is likely to have a lot lower capacity and output than the $30 million plant would, which means that it might not be sufficient for the required operation - and that by putting in the remaining $10 million would probably gain you a plant that produces well more than double compared to the option that at that point will cost 50 %, so it is relatively cheaper! It is definitely a logic fallacy to draw that kind of a direct conclusion based on only one variable. --84.250.188.136 (talk) 00:41, 18 June 2008 (UTC)

Well, for the sake of the example the assumption is that the factories differ only in cost. That is not a logical fallacy but an unrealistic assumption. I'm sure you mean the example is fundamentally unsound, which would I agree with you on. It is a bad example. A better, simpler way to see the fallacy in action is poker. Often people will continue to bet after putting money in the pot because they are afraid of losing that money. But if it's clear that your hand stinks, betting more money only makes your losses worse. 76.10.180.79 (talk) 01:42, 1 May 2016 (UTC)

Nuclear plant example does not follow
This is not an example of sunk cost because utilities are regulated and their rates are based on how much they spent. The more they spend the higher the rate to the consumer.

This was one reason the telephone monopoly, ATT, was broken up, they were spending billions of dollars wiring new houses so they could get higher rates, but much of the wiring wasn't used by consumers. 67.150.104.16 (talk) 06:58, 9 August 2010 (UTC)jimmyreno

The key to observe in making this calculation is that the sunk cost of $5.5 billion is irrelevant to future costs and benefits. Studies indicated that, if the $5.5 billion were ignored, the future costs of the nuclear power plant would be slightly less than the next-best alternative, even though the total cost was far higher than the alternative. A pure economic analysis would conclude that the most efficient outcome would be to not open the Shoreham nuclear power plant. If sunk costs are ignored and the nuclear plant future cost is less, the most efficient outcome would be to open the nuclear plant. 128.227.7.83 (talk) 16:41, 4 August 2009 (UTC)

Merge proposal
The proposal is to merge the article Sunk cost dilemma to here.

The situation is confusing (at least for me). This article (Sunk costs), in the section The sunk cost dilemma, states: "The sunk cost dilemma with its sequence of good decisions should not be confused with the sunk cost fallacy, where a misconception of sunk costs can lead to bad decisions." However, what is described in Sunk cost dilemma (except for the first sentence) is precisely the sunk cost fallacy in which a sequence of actually bad decisions leads to "disaster".

What is further confusing is that usually the tendency to favour the bad decisions is ascribed to the (irrational) loss aversion of the sunk costs, while the Lehmann model, at least as described in Sunk cost dilemma, ignores sunk costs. Based on a cursory examination, the Lehmann model does not pass the notability test and should therefore probably not be included in the merge.

A possible alternative to this merge is to spin off an article Sunk cost fallacy into which Sunk cost dilemma is merged. Google scholar gives me 471 hits for "sunk cost fallacy", so there has to be potential. --Lambiam 07:53, 11 August 2009 (UTC)

 * If it helps, the same person who wrote the section called "sunk cost dilemma" in this article also started the article with that title. I'm not terribly versed in this area, but my understanding was that the two terms ("fallacy" and "dilemma") referred to the same thing, so I'm in favor of a merger or redirect.  Sisterdetestai (talk) 04:15, 10 November 2009 (UTC)

 * The sunk cost dilemma and sunk cost fallacy are definitely two separate, though related, concepts. The sunk cost fallacy is mistakenly taking into account sunk costs when making a decision. The sunk cost dilemma results from the opposite: when sunk costs are ignored in decision-making, resulting in a series of decisions which are correct at the time they are made, but ultimately result in an adverse outcome. The dilemma occurs when the benefit is back-loaded, but the costs accrue incrementally. At each decision point, if you ignore the sunk costs, the future benefit will outweigh the future costs. However, this can result in the cumulative costs outweighing the cumulative benefit. Hence the dilemma: even if you make good decisions the entire way by ignoring sunk costs, you might still lose. The sunk cost dilemma should have it's own page, since there's a whole range of information that can be written about it, and because it's one of the main reasons for cost overruns in projects. 98.94.134.88 (talk) 17:54, 24 September 2010 (UTC)

 * I support merging the sunk cost dilemma and sunk cost fallacy  into this article with a redirect from the two pages to the sunk cost page.

--Mjjzf (talk) 10:35, 31 December 2011 (UTC)

Not limited to retrospective costs
"sunk costs are retrospective (past) costs which have already been incurred and cannot be recovered."

A sunk cost is an expenditures that has been "made or committed to in the past and is now irreversible."Goodwin, N, Nelson, J; Ackerman, F & Weissskopf, T: Microeconomics in Context 2d ed. page 202. Sharpe 2009 For example, a firm builds a plant using borrowed money. Payments required under the promissory note would be sunk costs. Jgard5000 (talk) 19:54, 30 October 2009 (UTC)Jgard5000Jgard5000 (talk) 19:54, 30 October 2009 (UTC)

Omission: non-refundable movie ticket example
The "Loss aversion and the sunk cost fallacy" section refers to "the above example involving a non-refundable movie ticket", but the example above in the 4th paragraph (right before the TOC and "Description" paragraph) is out of sync. I'm guessing the example used to state something like this: a ticket was purchased to a movie the buyer didn't really want to see, but ticket prices went up, so the buyer felt like they had to see the movie anyway, hence: throwing good money after bad. —Preceding unsigned comment added by Meonkeys (talk • contribs) 20:44, 19 May 2011 (UTC)

 * Somehow the "above example" was changed to a baseball game ticket (which seems rather US-centric to me). I adapted the later section a bit, but really they should be brought into sync in a more generic manner ("event ticket"?) that can apply to anyone. Huw Powell (talk) 20:23, 27 August 2016 (UTC)

 * Same thoughts. What's up with that section referring to some example which doesn't seem to be there? •nix• 17:59, 4 September 2016 (UTC) — Preceding unsigned comment added by I.narinder (talk • contribs)

Bad Example
The article has a bad example of how to make decisions by disregarding sunk costs: "The sunk cost is distinct from economic loss. For example, when a car is purchased, it can subsequently be resold; however, it will probably not be resold for the original purchase price. The economic loss is the difference (including transaction costs). The sum originally paid should not affect any rational future decision-making about the car, regardless of the resale value: if the owner can derive more value from selling the car than not selling it, then it should be sold."

The reason it's bad is that only works if you are not buying another car. If you are buying another car, then you cannot just consider the ownership cost vs. the resale cost -- you also have to consider how much many you'll sink into a new purchase. For example, imagine that:

1. You have to pay an estimated $500 in upkeep to own your car over the next year. 2. You could sell your car for $4000. 3. You have to sink $5000 into the purchase of a car (let's say for taxes and dealership markup that you can't recoup when you sell).

According to the bad example on this page, you should sell your car because $4000 re-sale is greater than $500 to maintain ownership.

But obviously, if you have to buy another car, you'd be better off keeping the one you have in order to avoid the future sunk costs.

In other words: it's not just your currently sunk costs that you have to consider. Future sunk costs matter, too.

64.134.173.63 (talk) 03:30, 2 August 2012 (UTC)

Wouldn't total available resources be a factor too? How can you ignore sunk costs affecting your decision since those sunk costs came out of a budget and therefore affect how much budget remains? The fallacy only seems to hold water if your budget is unlimited, which is impossible in the real world. If my budget is $100, and a sunk cost is $50, then all I have left is $50 to spend on future costs. My sunk cost most definitely affects what I can or cannot do going forward so is a real, ongoing factor and does bring future consequences. With very large resources, e.g. governments, this can be masked but is still true.50.21.206.12 (talk) 08:21, 28 April 2018 (UTC)

 * You've already spent the money. You can wish all you want that you hadn't spent it, but you did, and it's never coming back. Unless you have a time machine, whatever effect your having spent it will have on your future expenditures, resources, and activities has already been incorporated. That's the whole point of the concept. Largoplazo (talk) 12:36, 28 April 2018 (UTC)

Ad Hominem is inappropriate
In "Description", the author writes "This generally shows a lack of planning, and often, intelligence." This statement is pejorative to economic actors (i.e, people) because it is most likely untrue; if it were defensible, I wouldn't object to it but I would call for citations. The article already refers to rationality, which is the core issue here; it's known, and I'm sure someone else can supply the citations, that primates act in emotional, irrational, and context-dependent ways;  planning and intelligence are not at issue. — Preceding unsigned comment added by 70.188.135.18 (talk) 01:12, 6 August 2012 (UTC)

- It might be a reference to the poverty cycle: a person isn't (academically or parentally) taught financing, so they make bad decisions. These bad decisions lead to a desire to "justify" their purchase, and thus unintentionally sinking the costs further in a cycle. The author probably let an insult slip there, but might've also meant "foresight", which is a subset of intelligence. "Foresight" seems to be the perfect word here. MoogleEarth (talk) 16:46, 19 February 2013 (UTC)

Do these examples count? And if not, what do they count as?
1. A person wants to buy one 20oz soda for $1.69, but the store has a sale: 2 for $3.00. The buyer perceives 19¢ as a waste because they're "getting a soda anyways", and possibly factoring in the second 19¢ as a "deal" they don't want to pass up. This might count because the buyer is counting the first soda as "sunk cost", and getting two as a potential saving of money.

2. A person opens up a package of food by accident, but eats it anyways "so it won't go stale". May also count for a mixture of this and the above: buying a bigger package of food because it costs less in total. But then again, this may be tainted too much by the fact that the food became more tempting upon opening the bag.

MoogleEarth (talk) 16:41, 19 February 2013 (UTC)

3. In a game of poker, forced bets, such as antes or blinds are sunk costs once the cards have been dealt. Poker, in my opinion is one of the most interesting examples of sunk costs and psychology with numerous examples. Often times, players, especially amateurs and beginners will keep betting even when it does not make sense to do so simply because they feel they are already pot-committed. For example, in a game of texas hold-em, a player has two hearts in his hand, and there are two hearts on the board after the turn, then the player has a 1 in 4 chance of making a flush on the river. Once the river card has been dealt, however, all bets prior to that card being dealt are sunk costs which should not be considered when making betting decisions in the final round. If the final card was not a heart, then the player should not continue to bet in most cases, but many beginners will think something along the lines of "I've already bet thirty bucks, so I should proably bet another five or I lose any chance of keeping my $30."

I think poker presents good examples of sunk costs, but wasn't sure where to work it into the article. Maybe someone else will have some ideas of how and where to add The donc (talk) 00:01, 19 March 2013 (UTC)

Ernest Dupuis III reference
I find the reference to Ernest Dupuis III odd. There is no reason to include it, and I suggest that it be removed.

Better examples needed
I understand the concept of sunk costs but think the examples given, with the movie ticket and the concert ticket, are not that good, because they don't involve "throwing good money after bad", at least not explicitly/prominently. You might have to spend some money to go to the movie/concert, but this should be negligible, and isn't mentioned in the examples anyway. What is mentioned is your mood and the weather at the time you have to go, which don't involve money. Most people would also not work instead of going to the movies/concerts, so they wouldn't gain any money by not going. Time is money, sure, and I value my free time, but I'm not putting a monetary value in front of each hour, are you ? I believe an example should clearly include spending more money if you go through, like with the Concorde that is also mentioned in the article. But something simpler because Concorde is a very complex issue involving national pride and things like that, impossible to put a monetary value in front of such things. Aesma (talk) 13:46, 22 November 2014 (UTC)

 * Not all costs are monetary. — Preceding unsigned comment added by 2602:306:CEB0:9EA0:445C:D3DA:36AC:8913 (talk) 20:32, 26 April 2016 (UTC)

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Dr. Friedman's comment on this article
Dr. Friedman has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

"The muddy discussion of fixed vs variable costs does not belong in the opening paragraph. (I'm not sure it belongs anywhere: for most purposes, sunk costs are a subset of fixed costs.)

The second paragraph alludes to traditional microeconomic theory. That is too narrow; by definition of sunk costs, they should be ignored in any consequentialist decision theory.

The third paragraph attributes apparent sunk cost fallacy behavior to loss aversion and framing effects. That is one possible explanation of the fallacy (although it is easy to screw it up). Another possible explanation is cognitive dissonance. And, of course, an apparent sunk cost fallacy may be nothing of the sort, once the decision maker's true incentives and constraints are identified."

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Friedman has published scholarly research which seems to be relevant to this Wikipedia article:

 * Reference : Daniel Friedman & Kai Pommerenke & Rajan Lukose & Garret Milam & Bernardo A. Huberman, 2004. "Searching for the Sunk Cost Fallacy," Experimental 0407007, EconWPA.

ExpertIdeasBot (talk) 16:59, 19 May 2016 (UTC)

Remove McAffee reference?
The Preston McAfee article linked in the sunk cost fallacy section is far more of a demonstration of McAfee's failure to understand the nature of the sunk cost fallacy (which obviously would include opportunity costs - duh) than it is a rebuttal. I'd recommend removing it as it clouds understanding of the fallacy by encouraging people to commit the same misunderstanding. — Preceding unsigned comment added by 67.168.176.62 (talk) 00:39, 26 June 2016 (UTC)

Dr. Altug's comment on this article
Dr. Altug has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

"This is an excellent entry. I do not have any further comments or edits."

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Altug has expertise on the topic of this article, since he has published relevant scholarly research:

 * Reference : Sumru G. Altug & Fanny S. Demers & Michel Demers, 2007. "Political Risk and Irreversible Investment," Koc University-TUSIAD Economic Research Forum Working Papers 0707, Koc University-TUSIAD Economic Research Forum.

ExpertIdeasBot (talk) 20:34, 1 July 2016 (UTC)

Cut section from article
Sunk cost dilemma

The economic approach that sunk costs should not be considered when decisions are being made can lead to a situation where the sum of a number of good decisions can lead to one big disaster. This dilemma can be described using a game theory approach for 1-player games.

The sunk cost dilemma with its sequence of good decisions should not be confused with the sunk cost fallacy, where a misconception of sunk costs can lead to bad decisions. Sunk-cost fallacy occurs when people make decisions about a current situation based on what they have previously invested in the situation. For example, spending $100 on a concert and on the day you find that it’s cold and rainy. You feel that if you don’t go you would’ve wasted the money and the time you spent in line to get that ticket and feel obligated to follow through even if you don’t want to.

 * I removed the above for a couple of reasons. One is that it fails to communicate any information.  Another is the second-person voice.  Yet another is the rather poor example - one could brave the rain and enjoy the concert, for an overall benefit. Huw Powell (talk) 20:28, 27 August 2016 (UTC)

Proposal - move back to "Sunk cost"
I don't know why this was moved from "Sunk cost" to "Sunk costs" in 2008. The person who did so didn't explain it beyond "correct lemma", whatever that means. Wikipedia practice is to place articles under the singular title. —Largo Plazo (talk) 15:05, 12 March 2010 (UTC)

 * The plural form does nothing for me. I have a feeling that this is a mass noun plural, meaning 'types' of sunk cost (each of which is singular) such as capital and reputation, which is probably useful when teaching Economics 101 from 10,000 feet.  However, each component is, separately, a sunk cost and if you aren't busy leaping past the straightforward definition into the counter-intuitive nature of human behaviour (as arrogantly idealized), it's almost certainly the better term (and page title). — MaxEnt 17:57, 20 December 2016 (UTC)
 * I went ahead and did it. Largoplazo (talk) 20:12, 20 December 2016 (UTC)

Social reputation pot commitment
If a certain person (of type "strong personality") gains sway over an initiative by saying "I known why I'm doing, I've had success before" (a strain of argument from authority) there's going to be a pretty stiff resistance to reversing course, if the reversal pikes the social calculus of dear leader's original leadership gambit. If a person is heavily invested in argument from authority, the only acceptable outcome is one that buttresses "I've had success before" with the subtext "doing it entirely my way".

Imagine the postmortem discussion: "we put forward a plan which we felt was based on logical analysis, and you basically said 'what do you know? I've got experience in these matters", then you took over (without having actually persuaded your key opposition of the merits of your proposal), and sure enough, three months later, it's all falling apart (pretty much exactly as we predicted it would), then you change course and adopt the rational plan your adversaries had put forward right from the outset, and now here you are, attempting to claim credit for the successful outcome—which actually took three months longer than it would have had we been in charge from the outset—and here you are, polishing up your long track record of 'father knows best'. Well, we think this stinks, and you better believe we're spreading the word". Imagine this is what lies behind the glowing Door Number Two, as endorsed by the calculus of walking away from the sunk cost of a losing proposition.

My view is that if the original plan wasn't decided on political rather than rational grounds, the plan will likewise be executed on political rather than rational grounds (as any rational person ought to expect). From where I sit, if this article doesn't take on the full decision context (at least somewhere), it will forever have one foot firmly planted in strawman rhetoric.

It's pretty easy to fall into the trap of imagining that the reputational sunk cost and the economic sunk cost both have the same sign, whereas much of the time the reputational sunk cost would better be modelled as pot committed (defined, for non-poker players, at glossary of poker terms).

Of course, this is all a big heap of OR until someone finds something cite-worthy. Unfortunately, on that score, I've got nothing. — MaxEnt 19:37, 20 December 2016 (UTC)

Poor example used in sunk cost fallacy
"So a pharmaceutical company’s attempt to justify high prices because of the need to recoup R&D expenses is fallacious. The company will charge market prices whether R&D had cost one dollar or one million dollars."

This statement itself is fallacious since it is assuming that the drug being developed is entering an existing market which is the only scenario where that statement is fair. In many cases this is absolutely not applicable and R&D is done to develop brand new drugs which have absolutely no competitor. The company will not charge 'market price' because there is no market price, it is what they set and it will always be comparable to the investment and risk they had to take to do it.

I get that people are often upset at pharmaceutical companies charging absolutely obscene prices for drugs, but not every country in the world is like USA which is where this argument has any value. This example is fallacious and is playing into the emotional argument where people are against 'big pharma' and is not a true example of the sunk cost fallacy at all, its just false ammunition for a rebuttal whenever someone claims a pharmaceutical company has to charge a lot because of R&D costs.

I'm not going to edit it in the article, I want to see what others think first. I believe the article would be fine without this example at all, just remove it. There is no need to have a second example. — Preceding unsigned comment added by 2001:8003:A9CD:1D00:BC61:1032:1830:7705 (talk) 16:09, 29 April 2019 (UTC)

Same point made three years ago
Someone made the same point three years ago. The fact that no consensus has been reached in three years may itself be evidence that the proposal to strike this example is not supported by the community. Nevertheless, it is important to note that we have now heard the objection twice. I have therefore moved the earlier comment here to keep them together:

Pharmaceutical R&D justification fallacy
"So a pharmaceutical company’s attempt to justify high prices because of the need to recoup R&D expenses is fallacious. The company will charge market prices whether R&D had cost one dollar or one million dollars."

What does this passage miss? Are market prices not determined by supply and demand? Does supply not depend on the costs producers face? Is R&D not one of those costs?

Does the "fallacy" hinge on the semantics of the word "recoup?" — Preceding unsigned comment added by 2602:306:CEB0:9EA0:445C:D3DA:36AC:8913 (talk) 20:27, 26 April 2016 (UTC)

 * The very idea of "market price" here is in error. We are typically dealing with a product that the company will have a monopoly on, at least for a while.  Huw Powell (talk) 20:30, 27 August 2016 (UTC)

Response
The claim in question is backed up by a citation to a reliable source, which I have just verified personally. Hence, you cannot delete the point based solely on an argument against it. (See: no original research.) You can add to the article a counterargument from a cited source. Keep in mind that the main point of any counterargument should be to clarify the concept of a sunk cost for the reader.

Aarre (talk) 18:37, 3 August 2019 (UTC)

 * I understand that there is a published source, The Cartoon Introduction to Economics, but I can assure you that any PhD in economics would wince at seeing it said that the drug company will charge the "market price", as opposed to "the price determined by market conditions". Usually, "market price" means a price determined by supply and demand in a highly competitive market. Here, we have a monopoly price, because only one company is selling the drug. Hence, there is, strictly speaking, no supply or demand curve, because the company is not a "price taker".

 * Using the word "market price" thus carries with it the connotation that the company is charging a low price determined by having to match the prices of competitors, and unable to make profit much beyond its costs. That's the opposite of what we want here---the company is charging a high price, determined more by the willingness of consumers to pay than by the prices competitors charge.

 * I know articles aren't supposed to have original research, but this is something taught in first-semester economics. If you don't believe me, I can probably rustle up a cite to where "market price" is described. See p. 939 of  https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=2551&context=journal_articles, for example.

 * Thus, I've changed "market prices" to "a high price", which I think helps convey the notion that the company will charge a high price. I've rephrased things a bit, too, just to clarify the writing there.
 * editeur24 (talk) 17:06, 1 September 2021 (UTC)

Viet Nam
I'm surprised to see no mention of Viet Nam in the article – "we must continue this war so that our boys shall not have died in vain". Maproom (talk) 07:35, 1 September 2021 (UTC)

 * That (or the US in Afghanistan) might make a good example for a separate section (the sunk cost fallacy in war), but it would be tricky to write. Vietnam is complicated, because the argument, if it was made, was being made around 1972 when the last US troops were being withdrawn and the war situation was excellent (no provincial capitals had fallen). The war wasn't lost till 1975, several years later, and at that time nobody was suggesting sending US troops back in.

 * Another complication for war examples is that if a country has a failure, it might be worthwhile to continue the war just to prove that the country can win it for future deterrence. This is an argument often made, sometimes validly, sometimes not.

 * If anyone wants to work on that, here's a place to start. (I am not von Hippel, by the way.) J. North African Studies,
 * Sunk in the Sahara: the applicability of the sunk cost effect to irredentist disputes

Karin Von Hippel Pages 95-116 | Published online: 29 Mar 2007 https://doi-org.proxyiub.uits.iu.edu/10.1080/13629389608718267

 * "The sunk cost effect describes the inability of decision makers to abandon chosen courses of action even when the costs outweigh the gains, potential or real. An examination of the background to the Western Sahara conflict suggests that Morocco has been victim to the sunk cost effect, even though the monarchy might not be able nor wish to abandon its policy after so many years’ commitment. The Moroccan experience is contrasted with some other well‐known cases of the sunk cost effect in contemporary international relations and mechanisms are suggested for avoiding it, even to the extent of intensifying commitments in order to bring the situation to a definitive conclusion."
 * editeur24 (talk) 17:22, 1 September 2021 (UTC)

Not at all clearly explained
The section Bygones principle contains this passage:

"Thus, if a new factory was originally projected to yield $100 million in value, and after $30 million is spent on it the value projection falls to $65 million, the company should abandon the project rather than spending an additional $70 million to complete it. Conversely, as a rational actor, if the value projection falls to $75 million the company should continue the project. This is known as the bygones principle or the marginal principle."

Partly because nothing is stated about the original cost of the project, but mainly because this is explained very, very poorly, it is impossible to understand how this reasoning is a consequence of the "bygones principle".

I hope someone knowledgeable about this subject and good at explaining things can rewrite this example so that it is much clearer than it is.

license: Creative Commons - Attribution Share-Alike - https://creativecommons.org/licenses/by-sa/4.0/

title: Talk:Sunk cost