Sunk Cost
Sunk cost refers to expenses that have already been incurred and cannot be recovered, regardless of future decisions. Since these costs cannot be recouped, they should not influence decision-making. However, people often fall prey to the sunk cost fallacy, allowing these irrecoverable costs to affect their choices irrationally. For instance, someone might insist on watching a movie they no longer find appealing simply because they have already paid for the ticket. Understanding and disregarding sunk costs is crucial for making rational decisions.
Definition
Sunk cost refers to costs that have already been incurred and cannot be recovered. Regardless of future decisions, these costs will not change. Since sunk costs cannot be recovered, they should not be considered when making decisions. However, many people are influenced by sunk costs, leading to irrational behavior. For example, even if a purchased movie ticket no longer interests you, you might still go to the movie to avoid wasting money. Understanding and ignoring sunk costs is an important step in making rational decisions.
Origin
The concept of sunk cost can be traced back to 18th-century economic theories. Adam Smith mentioned similar concepts in his book 'The Wealth of Nations,' but the term 'sunk cost' was formally introduced and widely applied in economics and management in the mid-20th century.
Categories and Characteristics
Sunk costs can be divided into the following categories:
- Fixed Sunk Costs: These are one-time costs, such as purchasing equipment or paying for licenses.
- Variable Sunk Costs: These costs increase over time or with usage, such as R&D expenses or marketing costs.
Characteristics:
- Irrecoverable: Once incurred, they cannot be recovered by any means.
- Should Not Influence Decisions: Future decisions should ignore these costs.
Similar Concepts Comparison
A concept similar to sunk cost is marginal cost. Marginal cost refers to the additional cost of producing one more unit of a product. Unlike sunk costs, marginal costs are variable and need to be considered in decision-making.
Specific Cases
Case One: A company invests 1 million yuan in developing new software but discovers insufficient market demand during the development process. At this point, the 1 million yuan development cost is a sunk cost. The company should decide whether to continue development based on future market prospects and other factors, not because of the already invested 1 million yuan.
Case Two: A person buys a concert ticket worth 200 yuan but feels unwell on the day of the concert. At this point, the 200 yuan ticket cost is a sunk cost. The person should decide whether to attend the concert based on their health condition, not because they don't want to waste 200 yuan.
Common Questions
Question One: Why shouldn't sunk costs influence decisions?
Answer: Because sunk costs have already been incurred and cannot be recovered, considering them further leads to irrational decisions.
Question Two: How to avoid the sunk cost trap?
Answer: When making decisions, focus on future costs and benefits, not on already incurred sunk costs.
