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 utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  2. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  3. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  4. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>
  5. What is a negative write-off?

    A negative write-off is a write-off conducted by a company or accountant after deciding not to pay back an individual or ... Read Full Answer >>
  6. How can tariffs cause inefficiencies in domestic industries?

    Any government regulation naturally creates inefficiencies in a pure supply and demand marketplace. When it comes to the ... 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. Active Trading Fundamentals

    Five Biggest Obstacles Facing First-Year Traders

    Address these five obstacles and you'll make significant progress as a first-year trader.
  6. Charts & Patterns

    Avoid The Perfection Trap In Trading

    Avoid the perfection trap and make peace with the market’s high levels of systematic noise.
  7. Trading Strategies

    Pros And Cons Of Paper Trading

    Most market novices should paper trade for a considerable amount of time, despite key drawbacks.
  8. Trading Strategies

    Uncovering Evidence Of Sector Rotation

    Stalk ETF performance lists over several weeks to uncover hidden institutional buying and selling strategies.
  9. Economics

    What Does Inferior Good Mean?

    The term “inferior good” does not describe a lack of quality, but rather, is an economic term used when discussing elasticity of demand for a good.
  10. Economics

    What Is a Giffen Good?

    A Giffen good is a product whose demand increases as its price increases, and falls when its price falls.

You May Also Like

Hot Definitions
  1. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  2. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  3. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  4. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  5. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  6. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
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!