What the Heck Are Sunk Costs?

Well to best describe it, a sunk cost is a cost that has already previously occurred in the project and cannot be recovered in any possible away. These costs are independent of any events related to the project. Now many people would think that this is something absolutely detrimental , that a cost like this could very much break the whole production and completion of a project. Well in reality, it can’t. In fact, sunk costs shouldn’t be considered at all when making investments or project decisions. Sunk costs are not even needed to be considered as relevant costs as those costs are the only ones that should be considered when making decisions for projects.

With sunk costs, these are listed as a fixed cost, which is a cost that doesn’t change in relation to the project’s production volume. This just means that as the project continues to grow and develop or go backwards even, these costs stay the same the whole time. However, not all fixed costs can be viewed as a sunk cost as sunk costs cannot be recovered while some fixed costs are able to be. Sunk costs are prior costs that exist as part of the project. A way to think of sunk costs could be you purchasing a seat at the Super Bowl. You plan on going to it but when the time comes for you to go, an event occurs that you must take care of. Your decision here now is to either go to the Super Bowl or complete the event, but the purchase of the Super Bowl seat is a sunk cost. This cost shouldn’t however affect your decision on what to prioritize as the cost cannot be reobtained.

SUNK COST FALLACY

Now that you understand what sunk costs are, you probably are wondering why they can cause businesses so many problems and issues when they work on projects and why they can be project enders. Well, the best way to explain this is that those businesses themselves don’t fully understand what sunk costs actually are. This helps the issue of “sunk cost fallacy” to continue to exist in project environments today and be a further issue in project growth and development. This sunk cost fallacy is explained by saying that the continuing investments and commitments in a project to “repair” sunk costs are verified and acceptable because the resources already invested into the project thus far will be lost otherwise. This is the impression that businesses believe to be true in project management but it isn’t actually and thus project managers are actually hurting themselves further with their goal of project completion.

This can sound confusing so we can break the explanation down with an example. Lets say you buy a movie ticket online and then head to the movies. When you get there, you learn that you don’t like the movie actually but sit through the movie anyways since you purchased the ticket. The ticket itself is the sunk cost and the fallacy of it is that because you bought the ticket, you feel like you are required to sit through the whole movie despite not liking it. In reality, you could just get up and not watch the rest of the movie as there is nothing else you can do to enjoy yourself and you can’t get your purchase reimbursed.

CAN YOU AVOID THE FALLACY?