Sunk cost dilemma
Encyclopedia
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.
As long as the project is neither completed nor stopped, the dilemma will keep presenting itself.
and decision theory
. He models the situation as a one-player game (like jigsaw puzzle
s 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:
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 cost
s, 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.
Dilemma
A dilemma |proposition]]") is a problem offering two possibilities, neither of which is practically acceptable. One in this position has been traditionally described as "being on the horns of a dilemma", neither horn being comfortable...
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.
As long as the project is neither completed nor stopped, the dilemma will keep presenting itself.
Game-theoretic model
The sunk cost dilemma has been described by Oliver F. Lehmann using concepts from game theoryGame theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
and decision theory
Decision theory
Decision theory in economics, psychology, philosophy, mathematics, and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision...
. He models the situation as a one-player game (like jigsaw puzzle
Jigsaw puzzle
A jigsaw puzzle is a tiling puzzle that requires the assembly of numerous small, often oddly shaped, interlocking and tessellating pieces.Each piece usually has a small part of a picture on it; when complete, a jigsaw puzzle produces a complete picture...
s and Rubik's Cube
Rubik's Cube
Rubik's Cube is a 3-D mechanical puzzle invented in 1974 by Hungarian sculptor and professor of architecture Ernő Rubik.Originally called the "Magic Cube", the puzzle was licensed by Rubik to be sold by Ideal Toy Corp. in 1980 and won the German Game of the Year special award for Best Puzzle that...
) 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 cost
Sunk cost
In economics and business decision-making, sunk costs are retrospective costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken...
s, 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.