What is Sunk Cost?
And what is the Sunk Cost Trap, or the Sunk Cost Fallacy?
Sunk Cost is a concept that is important to project management, and in this video, I’ll tell you what it is.
This video is safe for viewing in the workplace.This is learning, so, sit back and enjoy
Definition of Sunk Cost
Sunk Cost is the investment (of money, resources, or time) that you have already made and can no longer recover. In the sense that you cannot recover them, the costs are ‘sunk’.
We can Compare Sunk Cost with a Future Cost.
Future costs can change. Therefore our decisions can influence future costs. They cannot influence sunk costs.
Therefore, the Sunk Cost Fallacy is the mistake we make, when we use arguments about investments we have already made to justify a decision about future actions or investments.
In the Video, we Take the Example of a New Prototype Product
We have invested $1 million dollars and have a prototype that nearly works. It will only cost $50 for the new component that will get it fully working.
We have learned that our competitor has already brought to market a far superior product that it sells at a substantially lower price point. It uses a more advanced technology that will make future developments easier.
Other competitors are advertising competing products that will raise the bar still further.
Our prototype is already out of date and the marketing and sales teams advise that we would not recover our promotion costs with sales revenue.
Should we invest $50 dollars to bring our $1 million product into service?
It’s just $50… one two-hundredth of a percent of our costs!
The answer is no.
The correct way to evaluate the future cost of $50 is this:
- Will that $50 investment bring a sufficient reward?
- Ignore the $1 million sunk cost.
Since the answer is no, that $50 would be ‘good money after bad’. We are better writing-off the $1 million investment and deploying the $50 on something of value.
Carefully curated video recommendations for you…
- What is Opportunity Cost?
- How to Deliver Effective Project Cost Management
- Project Financial Management – 5 Tips for Good Project Cost Control
- Project Business Case: Write an Effective Project Proposal
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