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All costs are always ”sunk”. The fallacy is to think that just because you’ve spent a lot of money, time, or effort, that that in itself warrants that you conti

All costs are always ”sunk”. The fallacy is to think that just because you’ve spent a lot of money, time, or effort, that that in itself warrants that you continue. In your athlete example, as long as she makes her decision based on risk and reward in the future, then that has nothing to do with sunk costs. If however she thought that her outlook as an athlete was bleak, but figured ”I’ve already dedicated seven years to this, might as well continue” - that would be the sunk cost fallacy.

yobbo 5y ago
One argument is that the total revenue of Concorde did not cover its total costs, therefore the program should have been cancelled. But it's more subtle. One interpretation is that past costs don't matter, therefore decisions should be based on expected value of further investments. In a slightly round-about way, more "sunk costs" means higher leverage on future investments. Whether it's a fallacy depends on high well you can estimate the future expected value, and how it depends on the current state.
- listenallyall 5y ago
  Actually, understanding sunk costs may have saved the Concorde rather than killing it. I'm using entirely made up numbers just as an example -- let's say that halfway through development, new estimates of total project costs were $1 billion and total revenue was only projected to be $750 million. Shut it down? Nope, because the first half-billion has already been spent. At this point, the options are to stop and get zero, or spend the second half-billion to see a 750m return. So work continues.
  - deleted 5y ago
    [deleted]
  - chii 5y ago
    > spend the second half-billion to see a 750m return or spend the 2nd half-billion on another project that returns more than 750m. Decisions should be made holistically, and consider all opportunity costs.
marcosdumay 5y ago
Of course, all past decisions are sunk. But knowing this doesn't help you decide if they lead you into a situation where your best choice is continuing to make them because the payout is close now, or if they were a bad idea and the best is to abandon their payout and pursue something better. The one thing that is certain is that those decisions have biased your options into the one they support. Deciding if that bias is strong enough is the hard step.
xyzzy21 5y ago
No. Cost can be in the future. That's the entire point of Cash Flow Analysis in finance and of planning in any other area.
- resoluteteeth 5y ago
  I think the comment you are responding to means that past costs are always sunk.
  - Cederfjard 5y ago
    Thanks! Yes, in this context, this is what I meant.

yobbo 5y ago

One argument is that the total revenue of Concorde did not cover its total costs, therefore the program should have been cancelled. But it's more subtle. One interpretation is that past costs don't matter, therefore decisions should be based on expected value of further investments. In a slightly round-about way, more "sunk costs" means higher leverage on future investments. Whether it's a fallacy depends on high well you can estimate the future expected value, and how it depends on the current state.

listenallyall 5y ago
Actually, understanding sunk costs may have saved the Concorde rather than killing it. I'm using entirely made up numbers just as an example -- let's say that halfway through development, new estimates of total project costs were $1 billion and total revenue was only projected to be $750 million. Shut it down? Nope, because the first half-billion has already been spent. At this point, the options are to stop and get zero, or spend the second half-billion to see a 750m return. So work continues.
- deleted 5y ago
  [deleted]
- chii 5y ago
  > spend the second half-billion to see a 750m return or spend the 2nd half-billion on another project that returns more than 750m. Decisions should be made holistically, and consider all opportunity costs.

marcosdumay 5y ago

Of course, all past decisions are sunk. But knowing this doesn't help you decide if they lead you into a situation where your best choice is continuing to make them because the payout is close now, or if they were a bad idea and the best is to abandon their payout and pursue something better. The one thing that is certain is that those decisions have biased your options into the one they support. Deciding if that bias is strong enough is the hard step.

xyzzy21 5y ago

No. Cost can be in the future. That's the entire point of Cash Flow Analysis in finance and of planning in any other area.

resoluteteeth 5y ago
I think the comment you are responding to means that past costs are always sunk.
- Cederfjard 5y ago
  Thanks! Yes, in this context, this is what I meant.