sunk cost


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Sunk Costs

Money that has already been spent. Sunk costs are important because a company may use, for example, an old piece of equipment to make a new product. In this case, sunk costs are positive because no further investment is required. On the other hand, a sunk cost may be negative; for example, that old piece of equipment may break down after its warranty has expired. This means that the owner will not recover the costs no matter what happens.

sunk cost

A past outlay or loss that cannot be altered by current or future actions.

sunk cost

the cost of durable and specific assets such as plant and machinery which cannot be used for other purposes or easily be resold. Where sunk costs represent a high proportion of a firm's total costs the firm may be ‘locked in’ to its existing products and markets, the sunk costs forming a BARRIER TO EXIT from the market. Since such specific assets have little alternative use they have no OPPORTUNITY COST and so naturally should not enter into management decision-making. Consequently in MAKE-OR-BUY DECISIONS the firm need not consider the sunk costs involved in making products but only the additional production costs as opposed to buying from outside suppliers.
References in periodicals archive ?
Or if you've stayed in a relationship long after you knew it was going wrong because you've been together for so long, you have fallen prey to the sunk cost fallacy.
Think of escalation of commitment and sunk cost as equivalent to the proverbial caution of "throwing good money after bad" or "in for a penny, in for a pound." Imagine a start-up company.
There are four ways to combat a sunk cost fallacy, and that is to SWIM.
The difference between persistence and sunk cost or lost cause is that while every step in persistence takes you closer to your goal, additional input in a lost cause drives you farther away from your goal.
This well-known cognitive phenomenon termed the "sunk cost fallacy" has long been considered a problem unique to humans.
The sunk cost fallacy keeps us eating bad meals, using outmoded IT systems, holding on to pasts that are already gone.This is an enduring lesson in business strategy as well.
Rooda, now a recent graduate of the University of Iowa, refused to accept this as a "sunk cost," so he created a wearable device that, in the simplest terms, combines the technology of a fitness tracker and a shock collar, alerting both farm staff and the sow when a piglet is being crushed.
This phenomena, known as the sunk cost effect, is exhibited when a previous investment of time, effort, or money increases the likelihood of continued investment (Arkes and Blumer 1985).
The Survey further says, "Since mining involves huge sunk cost, the government should allow only a limited number of large domestic companies with proven track record to compete with CIL and also to bring in the latest technology and skills."
Otherwise, firms engage in FDI and establish a production plant in the foreign country, incurring an exogenous, positive sunk cost. In the second stage, monopoly unions set their optimal wage strategies, competing with each other in the labor market.
He explained that a brief period of mindfulness meditation can encourage people to make more rational decisions by considering the information available in the present moment, while ignoring some of the other concerns that typically exacerbate the sunk cost bias.
The most notable examples of violations to the rational decision making model are the sunk cost effect (Arkes & Blumer, 1985) also considered in terms of escalation to commitment (Staw, 1976; Whyte, 1991) and the Allais Paradox (Allais, 1953; Li, 1994).