sunk cost (SC)

A sunk cost is money that has already been spent and cannot be recovered. Logic dictates that because sunk costs will not change -- no matter what actions are taken -- they should not play a role in decision-making. Emotionally, however, the more someone invests time, effort and money on something, the harder it becomes to leave it and move on.

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A sunk cost is money that has already been spent and cannot be recovered. Sunk costs are also called retrospective costs.

Logic dictates that because sunk costs will not change -- no matter what actions are taken -- they should not play a role in decision-making. Emotionally, however, the more someone invests time, effort and money on something, the harder it becomes to leave it and move on. This tendency to want to continue investing in something that clearly isn't working is known as the sunk cost effect

In information technology, money spent on legacy IT systems is often considered a sunk cost. When a company has spent a significant amount of money in an enterprise resource planning (ERP) system, for example, but the system is not meeting the organizations's current business needs, management has to consider whether to continue investing in the system to try and fix what isn't working. In such a scenario, the money that has already been spent -- the sunk costs -- should not play a role in the decision-making process. 

 

This was first published in March 2013

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