4 Examples of Sunk Costs
John Spacey, April 22, 2023
A sunk cost is a cost that has already occurred that can't be recovered. This is an important concept in problem solving and decision making because it is a common mistake, known as the sunk costs fallacy, to continue with a poor strategy because you've already invested in it. This can become quite tragic whereby the more you invest, the greater your commitment and the greater your losses. The following are common examples of a sunk cost.
TimeYou join a community college program and after the first year you are thoroughly convinced that it's not for you. The sunk cost here is all the tuition, time, effort and missed opportunities of spending a year in a school. In theory, all of these costs should not be a consideration in your decision to stay or to pursue some new opportunity.
InvestmentsAn investor keeps buying more of a stock when it keeps going down to try to recover their initial investment. In theory, how you invest new money should not be influenced by your current or historical losses.
ProjectsAn IT project is failing to integrate with existing processes and systems and everyone knows that the project will never have any benefits for the business. However, a firm continues to pursue the project because they have already spent $18 million on it.
BusinessA small business owner opens a restaurant that fails to thrive. They decide to invest more in promotion to try to recoup. This spending may make sense if it is likely to pay back but the unrecoverable costs of launching the restaurant are sunk costs that logically play no role in the spending decision.Read more about sunk costs here.
Opportunity CostsThis is the complete list of articles we have written about opportunity costs.
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