Sunk costs are costs that have already been incurred and cannot be recovered. Examples of sunk costs include rent, marketing expenses, and the purchase of equipment. The concept of sunk costs is important to understand to make rational decisions.
When making decisions, it’s important to focus on future costs and benefits rather than past ones. Unfortunately, many people do the opposite, which is known as the sunk cost fallacy.
One should not consider past investments when making decisions about the future. For example, let’s assume you bought tickets to a concert for $150. However, you realize later that you don’t want to go anymore. It would be irrational to continue going because you spent money on the tickets.
The best decision would be to accept the loss and move on with your life.
The concept of sunk costs can be traced back to the early days of economic theory, with the term itself likely originating in the late 19th and early 20th centuries.
Over the years, many economists explored the relationship between costs and the rationality of decision-making. Their work laid the foundation for understanding how sunk costs differ from other costs, including treating them in the context of decision-making.
Experts apply the concept of sunk cost in various areas, including business, finance, and psychology.
Sunk costs are a crucial aspect of decision-making processes. Considering sunk costs helps prevent irrational choices and suboptimal outcomes.