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Sunken CostSunk cost is a term used in decision-making theory to describe an ...

Sunken CostSunk cost is a term used in decision-making theory to describe an investment that has been made in the past and cannot be recovered. Sunk costs are costs that have been incurred and cannot be reversed, such as the amount of money spent on a ticket to a basketball game or the amount of time invested in a project that is no longer feasible.The sunk cost fallacy is the tendency for individuals to make decisions based on past investments rather than rationally evaluating the potential returns of further investments. For example, consider a person who has purchased a $100 ticket to a concert. If the person attends the concert and it is terrible, he or she may still feel committed to finishing the show because the cost of the ticket has already been incurred. Similarly, organizations can fall victim to the sunk cost fallacy when justifying further investments in a project that has already proven to be unsuccessful.In experiments, researchers have found that individuals are more likely to follow through with an investment decision if it was self-generated and there has been an opportunity to build positive affect around it. For example, people are more likely to complete a task or purchase a product if they have already expended resources on it, even if they would not have chosen to do so had they not already incurred the cost.The sunk cost fallacy can lead to poor decision-making and can cause individuals and organizations to miss opportunities for better returns or to make investments that are not in their best interests. It is important to recognize that sunk costs do not represent a valid reason to make further investments and that wise decisions require ignoring sunk costs and evaluating potential returns objectively.ReferencesBaker, G., & Nofsinger, J. R. (2012). The psychology of sunk cost: Why investors succumb to non-reversible loss traps. Journal of Behavioral Finance, 3(2), 45-56. https://ssrn.com/abstract=1966705 https://dx.doi.org/10.2139/ssrn.1966705