Sunk cost fallacy: Difference between revisions

Latest revision as of 01:14, 7 August 2021

Project appraisal.

The sunk cost fallacy is the mistaken belief that already-committed costs ('sunk costs') are relevant for financial decision making.

In reality it is only the opportunity costs of resources that are relevant.

Consequences of the sunk cost fallacy include:

Continuing with projects that should be discontinued, and "throwing good money after bad";
Failure to close out loss-making market positions.

@@ Line 1: / Line 1: @@
-''Cognitive bias''.
+''Project appraisal''.
-The sunk cost fallacy is the tendency of individuals and organisations to be more likely to continue with a project if they have already invested a lot of money, time, or effort in it, even when continuing is not the best thing to do.
+The sunk cost fallacy is the mistaken belief that already-committed costs ('sunk costs') are relevant for financial decision making.
-This is sometimes known as "throwing good money after bad".
+In reality it is only the opportunity costs of resources that are relevant.
-One antidote to this tendency is to appreciate that "sunk costs don't count" in rational decision-making.
+Consequences of the sunk cost fallacy include:
+*Continuing with projects that should be discontinued, and "throwing good money after bad";
+*Failure to close out loss-making market positions.
 == See also ==
-* [[Affinity bias]]
-* [[Bandwagon bias]]
-* [[Behavioural economics]]
-* [[Choice supporting bias]]
 * [[Cognitive bias]]
-* [[Confirmation bias]]
+* [[Incremental cash flows]]
-* [[Emotional intelligence]]
+* [[Opportunity cost]]
-* [[Objectivity]]
+* [[Project appraisal]]
-* [[Optimism bias]]
+* [[Stop-loss limit]]
-* [[Self-investment bias]]
-* [[Social bias]]
 * [[Sunk costs]]