|WikiProject Business / Accounting||(Rated Start-class, Low-importance)|
|WikiProject Economics||(Rated Start-class, Mid-importance)|
- 1 Magnitude of loss aversion
- 2 Too much Second Person
- 3 Omission: bottom line often entails a loss.
- 4 Omission: terminology
- 5 Omission: the role of ambiguity
- 6 Not all investments are (typical) sunk costs
- 7 References
- 8 Sunk cost fallacy and War
- 9 Merge from bygones principle to here
- 10 Huge Error
- 11 Nuclear plant example does not follow
- 12 Merge proposal
- 13 Not limited to retrospective costs
- 14 Proposal - move back to "Sunk cost"
- 15 Omission: non-refundable movie ticket example
- 16 External links
- 17 Bad Example
- 18 Ad Hominem is inappropriate
- 19 Do these examples count? And if not, what do they count as?
- 20 Ernest Dupuis III reference
Magnitude of loss aversion
I'm sure there are studies, either in economics or in psychology, which seek to quantify the degree to which people are "waste-averse". It might be interesting to cover some of those results. -- Ryguasu
- The page on Loss aversion (linked from the article) says that people are about twice as averse to a loss as attracted to gains. Josh Parris 06:46, 27 October 2005 (UTC)
- For example, when you pre-order a movie ticket, the price of the ticket becomes a sunk cost. Even if you decide that you'd rather not go to the movie, there is no way to get back the money you originally paid and you have a sunk cost on your hands. This assumes, of course, that you can't simply return the movie ticket for a refund, and that you can't resell the ticket.
...Both of which, you usually can, making this a particularly stupid example.
Too much Second Person
- Mischief Managed Brian Sayrs 00:31, 15 April 2006 (UTC)
In addition to the sunk cost, there are usually more costs associated with sticking to the original plan. In the example of the movie ticket, the buyer would still incur some expense in getting to the movie theater, and might pay a lot more money for a soda than he would have had he stayed home. Therefore, not only is the bottom line theoretically unaffected by seeing through with the decision, but it usually is entails a loss.(edited to correct spelling of omission)
The terminology often used to explain the effect of the sunk cost contains the words "Bottom Line." Meaning the bottom line is the same whether or not the person chooses to actually go, therefore the cost should not be part of the decision.
Also, the language used to explain the emotional side of the argument usually contains the terms: "retroactive" and "legitimize." Thus the person who considers going even though he no longer wants to does so in order in an attempt to emotionally "retroactively legitimize" the poor decision to buy the ticket in the first place.(ditto omission)
Omission: the role of ambiguity
There is a set of studies showing how the sunk cost effect is due to the ambiguity of the situation rather than some irrational reasons. Ambiguity allows to interpret a situation in a way that is consistent with the continuation of an investment. In fact the consideration of a failed investment as affected by the sunk cost is often made ex-post that is after the results have appeared. This latter judgment about a seemingly fallacious situation is considered itself as retrospective fallacy.(ditto omission and ambiguity)
Not all investments are (typical) sunk costs
I think that one problem with the article is that it equates all investments with sunk costs. In the example with the ticket someone has bought for a movie that he doesn't want to see, the costs of the ticket are indeed not recoverable. They are sunk costs.
But in case of Elia Kazan's films most of the money for most of his films the studios invested in could be recovered. Sure, he used the "point of no return" tactic to trick the studios into investing even more money. But those weren't really sunk costs. They could be recovered.
It is important to make this distinction, as in the case of the cinema ticket the economically sound decision is to just throw the ticket away. Otherwise more money is spent on something that was a failure in the first place. But in the case of the Elia Kazan films it actually made sense to spend more money to finish the film and recover costs by getting the film into the cinemas.
This distinction is also important for pricing decisions: For example, if a company has made a really bad investment into a failed first attempt to develop a product, but succeeded to develop it in a second try, it is wrong to calculate the product's price on the base of the full cost of all the investments that went into the product. The costs for the failed first try do not belong to the product.
A competitor who got things right with just one try would easily undercut that price, and the product might be a failure in the market just because it is overpriced. Which then would mean that the costs for the second development effort would be sunk costs as well.
But it is also wrong to completely ignore investment costs in product pricing because asking for a price that is significantly higher than the variable costs is the only possibility one has to recover investment costs. --220.127.116.11 01:04, 28 August 2006 (UTC)
- It seems to me that the Elia Kazan story is a perfectly good example of sunk costs. The studio can't sell back the exposed film or demand that the actors and techs return their salaries. Completing the film and distributing it for a profit does not recover the sunk costs--it generates new revenue. Economically, the sunk costs subtract from the total costs of completing the movie, which improves the ratio of future costs to anticipated revenue. But if the future cost/benefit ratio is still poor compared to other competing projects (for which all costs are future costs), a rational studio exec should abandon the project.
- Also, both product development efforts are legitimate costs of the product, and if I were pricing a product based only on development costs I would certainly count the first, failed effort as well as the second one. If a competitor enters the market, my pricing will have to adjust to be competitive, but that has nothing to do with my development costs.
- You seem to be confusing the term "sunk cost" with "total loss"; sunk costs are often recouped when a project is completed; the term just describes those costs which cannot be recovered simply, such as by returning unsold inventory. --18.104.22.168 04:44, 10 May 2007 (UTC)
When determining sunk costs, one has to define what to include when determining what the question should be. If one buys a ticket to go see a movie, only the first part is a monetary one, hence 'sunk costs'. Deciding whether using the time lost at the movie for other endeavors would be more monetarily beneficial is the decision in question.The movie making example is closer to building a factory. A factory has to be built first to make money second. $20 million already invested - $10 million to complete, but can make another one for $5 million it is clear which choice to make. A movie has to be completed to make money. Now whether making a new movie from scratch would be a better choice, would depend on the cost of making a second movie. Marketing of the first movie would already have begun as well as anticipation already generated from expecting the movie to be completed. Not to mention controversy about cost overruns makes for great publicity. Would making a second movie make more money than finishing the first. One wouldn't make a second factory for another $20 million if the first one could be finished with another $10 million. The examples given do not determine the ability to recoup costs as part of sunk costs but more so to the accuracy of the choice in question. One cannot recoup the cost of spending money on a movie ticket..deciding if it is worth going to said movie is the choice. The sunk costs should not interfere with the choice involved. The spent x dollars on movie A so far. New decision now. Can they make more dollars from making movie B at cost z or make more from movie A of new cost y not including cost x so far.
It will take friggin' forever to find which source is for which part of this article. —The preceding unsigned comment was added by 22.214.171.124 (talk • contribs) 16:22, 14 September 2006 126.96.36.199.
Sunk cost fallacy and War
How else can you explain the troop buildups in Vietnam and now Iraq? Just because you bought the ticket to the wrong movie doesn't mean you have to go... 188.8.131.52 21:26, 11 January 2007 (UTC)
The author seems to neglect fixed costs, that are also opposed to variable costs but different from sunk costs. —The preceding unsigned comment was added by 184.108.40.206 (talk • contribs) 15:21, 9 February 2007 220.127.116.11.
Merge from bygones principle to here
Please look at the information in Bygones principle and see if you think it should be merged here. The merge from Bygones principle was actually suggested on that page in 2006. --SueHay 01:33, 10 March 2007 (UTC)
- They seem to be similar enough to support a merge to me at least. --18.104.22.168 13:51, 5 June 2007 (UTC)
If only to make it easier for the search engine to find the page, this page should have the phrase "throwing good money after bad" somewhere on it. It's a colloquial form often used in actual boardrooms :) —Preceding unsigned comment added by 22.214.171.124 (talk) 12:11, 15 October 2007 (UTC)
There is a fundamental fallacy in the article. It directly compares two projects, one costing $30 million and another one costing $5 million and claims that it is "obviously" rational to choose the latter at the $20 million mark, completely failing to consider anything but the cost - namely the fact that a $5 million plant is likely to have a lot lower capacity and output than the $30 million plant would, which means that it might not be sufficient for the required operation - and that by putting in the remaining $10 million would probably gain you a plant that produces well more than double compared to the option that at that point will cost 50 %, so it is relatively cheaper! It is definitely a logic fallacy to draw that kind of a direct conclusion based on only one variable. --126.96.36.199 (talk) 00:41, 18 June 2008 (UTC)
Nuclear plant example does not follow
This is not an example of sunk cost because utilities are regulated and their rates are based on how much they spent. The more they spend the higher the rate to the consumer.
This was one reason the telephone monopoly, ATT, was broken up,
they were spending billions of dollars wiring new houses so they could get higher rates, but much of the wiring wasn't used by consumers.
188.8.131.52 (talk) 06:58, 9 August 2010 (UTC)jimmyreno
The key to observe in making this calculation is that the sunk cost of $5.5 billion is irrelevant to future costs and benefits. Studies indicated that, if the $5.5 billion were ignored, the future costs of the nuclear power plant would be slightly less than the next-best alternative, even though the total cost was far higher than the alternative. A pure economic analysis would conclude that the most efficient outcome would be to not open the Shoreham nuclear power plant.
If sunk costs are ignored and the nuclear plant future cost is less, the most efficient outcome would be to open the nuclear plant.
Not limited to retrospective costs
"sunk costs are retrospective (past) costs which have already been incurred and cannot be recovered."
A sunk cost is an expenditures that has been "made or committed to in the past and is now irreversible."Goodwin, N, Nelson, J; Ackerman, F & Weissskopf, T: Microeconomics in Context 2d ed. page 202. Sharpe 2009 For example, a firm builds a plant using borrowed money. Payments required under the promissory note would be sunk costs. Jgard5000 (talk) 19:54, 30 October 2009 (UTC)Jgard5000Jgard5000 (talk) 19:54, 30 October 2009 (UTC)
Proposal - move back to "Sunk cost"
I don't know why this was moved from "Sunk cost" to "Sunk costs" in 2008. The person who did so didn't explain it beyond "correct lemma", whatever that means. Wikipedia practice is to place articles under the singular title. —Largo Plazo (talk) 15:05, 12 March 2010 (UTC)
Omission: non-refundable movie ticket example
The "Loss aversion and the sunk cost fallacy" section refers to "the above example involving a non-refundable movie ticket", but the example above in the 4th paragraph (right before the TOC and "Description" paragraph) is out of sync. I'm guessing the example used to state something like this: a ticket was purchased to a movie the buyer didn't really want to see, but ticket prices went up, so the buyer felt like they had to see the movie anyway, hence: throwing good money after bad. —Preceding unsigned comment added by Meonkeys (talk • contribs) 20:44, 19 May 2011 (UTC)
The article has a bad example of how to make decisions by disregarding sunk costs: "The sunk cost is distinct from economic loss. For example, when a car is purchased, it can subsequently be resold; however, it will probably not be resold for the original purchase price. The economic loss is the difference (including transaction costs). The sum originally paid should not affect any rational future decision-making about the car, regardless of the resale value: if the owner can derive more value from selling the car than not selling it, then it should be sold."
The reason it's bad is that only works if you are not buying another car. If you are buying another car, then you cannot just consider the ownership cost vs. the resale cost -- you also have to consider how much many you'll sink into a new purchase. For example, imagine that:
1. You have to pay an estimated $500 in upkeep to own your car over the next year. 2. You could sell your car for $4000. 3. You have to sink $5000 into the purchase of a car (let's say for taxes and dealership markup that you can't recoup when you sell).
According to the bad example on this page, you should sell your car because $4000 re-sale is greater than $500 to maintain ownership.
But obviously, if you have to buy another car, you'd be better off keeping the one you have in order to avoid the future sunk costs.
In other words: it's not just your currently sunk costs that you have to consider. Future sunk costs matter, too.
Ad Hominem is inappropriate
In "Description", the author writes "This generally shows a lack of planning, and often, intelligence." This statement is pejorative to economic actors (i.e, people) because it is most likely untrue; if it were defensible, I wouldn't object to it but I would call for citations. The article already refers to rationality, which is the core issue here; it's known, and I'm sure someone else can supply the citations, that primates act in emotional, irrational, and context-dependent ways; planning and intelligence are not at issue. — Preceding unsigned comment added by 184.108.40.206 (talk) 01:12, 6 August 2012 (UTC)
- It might be a reference to the poverty cycle: a person isn't (academically or parentally) taught financing, so they make bad decisions. These bad decisions lead to a desire to "justify" their purchase, and thus unintentionally sinking the costs further in a cycle. The author probably let an insult slip there, but might've also meant "foresight", which is a subset of intelligence. "Foresight" seems to be the perfect word here. MoogleEarth (talk) 16:46, 19 February 2013 (UTC)
Do these examples count? And if not, what do they count as?
1. A person wants to buy one 20oz soda for $1.69, but the store has a sale: 2 for $3.00. The buyer perceives 19¢ as a waste because they're "getting a soda anyways", and possibly factoring in the second 19¢ as a "deal" they don't want to pass up. This might count because the buyer is counting the first soda as "sunk cost", and getting two as a potential saving of money.
2. A person opens up a package of food by accident, but eats it anyways "so it won't go stale". May also count for a mixture of this and the above: buying a bigger package of food because it costs less in total. But then again, this may be tainted too much by the fact that the food became more tempting upon opening the bag.
3. In a game of poker, forced bets, such as antes or blinds are sunk costs once the cards have been dealt. Poker, in my opinion is one of the most interesting examples of sunk costs and psychology with numerous examples. Often times, players, especially amateurs and beginners will keep betting even when it does not make sense to do so simply because they feel they are already pot-committed. For example, in a game of texas hold-em, a player has two hearts in his hand, and there are two hearts on the board after the turn, then the player has a 1 in 4 chance of making a flush on the river. Once the river card has been dealt, however, all bets prior to that card being dealt are sunk costs which should not be considered when making betting decisions in the final round. If the final card was not a heart, then the player should not continue to bet in most cases, but many beginners will think something along the lines of "I've already bet thirty bucks, so I should proably bet another five or I lose any chance of keeping my $30."
I think poker presents good examples of sunk costs, but wasn't sure where to work it into the article. Maybe someone else will have some ideas of how and where to add The donc (talk) 00:01, 19 March 2013 (UTC)
Ernest Dupuis III reference
I find the reference to Ernest Dupuis III odd. There is no reason to include it, and I suggest that it be removed.