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In economics and business decision-making, a sunk cost (also known as retrospective cost) is a cost that has already been incurred and cannot be recovered. [ 1 ] [ 2 ] Sunk costs are contrasted with prospective costs , which are future costs that may be avoided if action is taken. [ 3 ]
Of these, sunk costs, time investment, decision maker experience and expertise, self-efficacy and confidence, personal responsibility for the initial decision, ego threat, and proximity to project completion have been found to have positive relationships with escalation of commitment, while anticipated regret and positive information framing ...
Firms can decide to reduce output, purchase fewer materials and even sell some machinery. Over 10 years, most costs become variable as workers can be laid off or new machinery can be bought to replace the old machinery [13] Sunk Costs – This is a fixed cost that has already been incurred and cannot be recovered. An example of this can be in R ...
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When some costs are sunk and some are not sunk, total fixed costs (TFC) equal sunk fixed costs (SFC) plus non-sunk fixed costs (NSFC) or TFC = SFC + NSFC. When some fixed costs are non-sunk, the shutdown rule must be modified. To illustrate the new rule it is necessary to define a new cost curve, the average non-sunk cost curve, or ANSC.
From the traceability source of costs, sunk costs can be direct costs or indirect costs. If the sunk cost can be summarized as a single component, it is a direct cost; if it is caused by several products or departments, it is an indirect cost. Analyzing from the composition of costs, sunk costs can be either fixed costs or variable costs.
This could be because of the sunk-cost fallacy. It’s a term borrowed from the finance world, but you don’t have to know a ton about economics to get it. “The sunk-cost fallacy refers to the ...