Sunk cost dilemma
A sunk cost dilemma is a dilemma of having to choose between continuing a project of uncertain prospects already involving considerable sunk costs, or discontinuing the project. Given this choice between the certain loss of the sunk costs when stopping the project versus possible – even if unlikely – long-term profitability when going on, policy makers tend to favour uncertain success over certain loss.[1]
As long as the project is neither completed nor stopped, the dilemma will keep presenting itself.
[edit] Game-theoretic model
The sunk cost dilemma has been described by Oliver F. Lehmann using concepts from game theory and decision theory. He models the situation as a one-player game (like jigsaw puzzles and Rubik's Cube) in which a sequence of decisions, each of which by themselves seem good, in the end lead to overall disaster.
The calculation of the payoff for each decision is:
- Payoffd = Project revenue − Open costs
while the calculated project payoff gets smaller.
Each time the decision has to be made, the strategy of going ahead with the project is dominant, i.e. has the highest payoff, which remains always positive.
As decisions are only made considering open costs but not sunk costs, each single decision is computed to be beneficial. But in the end, the overall payoff of the project is negative. While the project progresses towards disaster, the decision not to go on with the project gets more and more unlikely. The project is like a train: once it has been put on a track, it is very difficult to change its direction.
[edit] See also
[edit] References
- ^ Hammond, Kenneth R.; Connolly, Terry; Arkes, Hal R. (2000). Judgment and decision making: an interdisciplinary reader. Cambridge, UK: Cambridge University Press. p. 104. ISBN 978-0-521-62602-6.
- Oliver F. Lehmann at Visionary Tools: The Sunk Cost Dilemma.
- Article - Strategies and their problems in practice
