Tip of the Week #41                     Tip Index

Go to the Prior Tip Billions & Billions: Thoughts on Life and Death at the Brink of the Millennium
Go to the Next Tip "Management's New Paradigms"
Return to MaxValue Home Page

"Of Mice and Economics"

column by Dan Seligman, Forbes, August 24, 1998, p. 62

"No proposition in economics is more firmly established in economics than the supreme irrelevance of sunk costs."  A sunk cost is money spent in the past.   This should have no influence on subsequent decisions except where prior expenditures are recognized in calculating future net cashflow impacted by such things as:

Some examples where people fall into the "fallacy of sunk costs" include:

Mice and other animals appear more rational:  Many species defend larger litters more vigorously.  Earlier losses are simply written off.

It appears that decision makers often feel that the sunk costs are somehow wasted if the asset is not used.  We seem compelled to justify the sunk costs in one's life.   Don't do it!  "Let bygones be bygones."

—John Schuyler, August 1998.

Copyright 1998 by John R. Schuyler. All rights reserved. Permission to copy with reproduction of this notice.