Sunk Cost Dilemma

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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.

BREAKING DOWN '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.

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