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. Mental Accounting

    An economic concept established by economist Richard Thaler, ...
  4. Anchoring

    The use of irrelevant information as a reference for evaluating ...
  5. Gambler's Fallacy

    When an individual erroneously believes that the onset of a certain ...
  6. Homo Economicus

    A term that describes the rational human being assumed by some ...
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. Trading Strategies

    How effective is creating trade entries after spotting an Exhaustion Gap pattern?

    Understand the components of the exhaustion gap pattern, how and why it occurs, and how it can be used to create an effective trading strategy.
  6. Chart Advisor

    Is It A Breakout? See The Point-And-Figure Chart

    These stocks have broken out of a triple top formation using point-and-figure charting, a bullish sign.
  7. Chart Advisor

    A Multi-Asset Income ETF For Defensive Investors

    In light of market volatility and worries that stocks are overbought, one product worth noting is the Guggenheim Multi-Asset Income ETF.
  8. Chart Advisor

    These Stocks Offer Range-Trading Opportunities

    These stocks are trading in ranges (or were recently) and present opportunities to buy at support or short sell at resistance.
  9. Investing has its ups and downs, but financial advisers can do much to prepare their clients and their clients' portfolios for such volatility.
    Investing Basics

    How Advisors Can Help Clients Stomach Volatility

    Investing has its ups and downs, but financial advisers can do much to prepare their clients and their clients' portfolios for such volatility.
  10. Chart Advisor

    These 4 Stocks Are Getting Squeezed For A Breakout

    These stocks are trading in a tight range that can't last for long. A break could result in the next major move of the trend.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center