Sunk Cost Dilemma

AAA

DEFINITION of 'Sunk Cost Dilemma'

A formal economic term that describes the emotional difficulty of deciding whether to proceed with or abandon a project when time and money have already been spent but the desired results have not been achieved. A sunk cost dilemma, when attempted to be resolved, requires an evaluation of whether further investment would just be throwing good money after bad. The purely rational economic man would consider only the variable costs, but most people irrationally factor the sunk costs into our decisions.

Also called the Concorde Fallacy.

INVESTOPEDIA EXPLAINS 'Sunk Cost Dilemma'

Sunk costs are expenditures that can't be recovered. For example, if you decide halfway through installing new hardwood flooring in your house that you hate the way it looks, you have a sunk cost. You can't return the flooring that's already been laid down. The dilemma is whether to install the rest of the flooring and hope you learn to love it because you hate the thought of losing the money you've already spent, or whether to accept the sunk cost, tear up the new wood floors and buy another type of flooring.

RELATED TERMS
  1. Rational Choice Theory

    An economic principle that assumes that individuals always make ...
  2. Rational Behavior

    A decision-making process that is based on making choices that ...
  3. Regret Theory

    A theory that says people anticipate regret if they make a wrong ...
  4. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
  5. Mental Accounting

    An economic concept established by economist Richard Thaler, ...
  6. Homo Economicus

    A term that describes the rational human being assumed by some ...
RELATED FAQS
  1. What is the relationship between research and development and innovation?

    Although it's possible to achieve innovation without research and development and it's possible to conduct research and development ... Read Full Answer >>
  2. How is minimum transfer price calculated?

    A company that transfers goods between multiple divisions needs to establish a transfer price so that each division can track ... Read Full Answer >>
  3. How does neoclassical economics relate to neoliberalism?

    While it may be likely that many neoliberal thinkers endorse the use of (or even emphasize) neoclassical economics, the two ... Read Full Answer >>
  4. What are common concepts and techniques of managerial accounting?

    The common concepts and techniques of managerial accounting are all the concepts and techniques that surround planning and ... Read Full Answer >>
  5. How is abatement cost accounted for on financial statements?

    Abatement costs are accounted for on a company's financial statements through increases in either cost of goods sold or operational ... Read Full Answer >>
  6. According to the neoclassical growth theory, what factors influence the growth of ...

    The neoclassical growth theory builds five major variables into its time-sensitive production formula. The first is total ... Read Full Answer >>
Related Articles
  1. Personal Finance

    Take the "Dope" Out of Your Finances

    The activity of the brain chemical dopamine can help make sense of our irrational financial decisions. Here's how to outsmart it.
  2. Active Trading Fundamentals

    Understanding Investor Behavior

    Discover how some strange human tendencies can play out in the market, posing the question: are we really rational?
  3. Active Trading Fundamentals

    Rational Ignorance And Your Money

    It's impossible to know everything about the markets. Find out how ignorance affects your investments.
  4. Active Trading Fundamentals

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  5. Economics

    Calculating Income Elasticity of Demand

    Income elasticity of demand is a measure of how consumer demand changes when income changes.
  6. Economics

    Understanding Implicit Costs

    An implicit cost is any cost associated with not taking a certain action.
  7. Economics

    Understanding Diseconomies of Scale

    Diseconomies of scale is the point where a business no longer experiences decreasing costs per unit of output.
  8. Economics

    What Does Capital Intensive Mean?

    Capital intensive refers to a business or industry that requires a substantial amount of money or financial resources to engage in its specific business.
  9. Economics

    What is an Original Equipment Manufacturer (OEM)?

    An OEM is a company whose products are used as components in another company's product.
  10. Trading Strategies

    Why Volatility Is Your Friend

    Instead of looking at falling share prices as something negative, investors should view it as an opportunity to acquire ownership in fundamentally strong companies at low prices.

You May Also Like

Hot Definitions
  1. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  2. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  3. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  4. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!