What is Sunk Cost? What is Sunk Cost Fallacy? FAQs

Table of contents:-

===========================================

What is Sunk Cost?

A sunk cost is the investment that is made in business which cannot be recovered. A metaphor that can be used to describe this better is that of a shipwreck where once the ship has sunk, there is no way to recover it. 

Because the sunk cost cannot be recovered, it is often not included in any future budget. Some common examples of sunk costs are office tables, chairs, printers, etc. which need replacement after a few years time. 

When the time for replacement comes, the money spent on the old equipment is considered a sunk cost. It is possible that some of the cost is recovered by either pawning or recycling. However, all the money that was initially invested cannot be recovered and hence, is sunken. 

Let’s take another example of any SaaS organization that invests in testing for a new feature that is ignored by the users and doesn’t lead to any sales. In such a case, the money that is invested in researching this feature would be considered a sunk cost because it cannot be recovered. 

The common action that makes this worse is put in more money into the process to reverse the loss. This is a mistake which is also called Sunk Cost Fallacy. 

What is a Sunk Cost Fallacy?

Sunk Cost Fallacy is the belief that further investment into a failing project can help to reverse the losses from the sunk costs. Many businesses are likely to make such decisions in order to avoid risk. 

Considering the previous example of the SaaS company with the failed feature, they may think of giving it another try by researching it further and adding more features so that the sunk cost can be revived. 

However, that is not what actually happens. The time spent initially is sunk and it shouldn’t be an inhibiting factor to move on with alternate decisions. 

The recommended course of action here is to realize that customers like the platform the way it is. If some update or feature is being ignored or not performing as well, it is best to leave it alone because your likes of an update may not match that of the users. 

Moreover, you should avoid trying to recover sunk costs by making unnecessary additions because all you are doing is actually increasing the sunk cost. 

FAQs

Q: What is Sunk Cost? 

A: A sunk cost is the investment that is made in business which cannot be recovered. The common action that makes this worse is put in more money into the process to reverse the loss. This is a mistake which is also called Sunk Cost Fallacy.

Q: What is an example of sunk cost? 

A: Some common examples of sunk costs are office tables, chairs, printers, etc. which need replacement after a few years’ time. When the time for replacement comes, the money spent on old equipment is considered a sunk cost. 

Q: What is Sunk Cost Fallacy? 

A: Sunk Cost fallacy is the belief that further investment into a failing project can help to reverse the losses from the sunk costs. Many businesses are likely to make such decisions in order to avoid risk. 

Crafting great product requires great tools. Try Chisel today, it's free forever.