Failing+to+Ignore+Sunk+Costs

A **sunk cost** is defined (by __Investopedia.com__) as a **cost that has been incurred** **and cannot be reversed or recovered to a significant degree**. A perfect example of this would be buying a package of channels on cable for $X a month. These channels have absolutely no resale value, and whether or not you watch them, you are still paying for the service. Therefore, because the money has already been paid, you should feel no obligation to watch the channels if there is something else you would rather do. Failing to ignore a sunk cost is a huge mistake, because, by dwelling on things that are in the past, one will have great difficulty preceding into the future while remaining economically rational. In our daily life, there is no easier place to find sunk costs than in the decisions made by those in positions of management. Whether it be for a company or a country, leaders whose jobs depend on public appearances may have more incentive to avoid the appearance of a total loss, and will continue upon a course of action while a cheaper (but less publicly appealing) alternative exists. In short, the easiest way to deal with sunk costs is to completely ignore them. To go back to the cable-channel package example, when you have bought and paid for the package, there are three possible results: No matter what you choose, you have to pay for the package of channels, so that part should be canceled out and ignored completely.
 * 1) You pay for the package and watch your new channels
 * 2) You pay for the package and do something more enjoyable than watching your new channels
 * 3) You pay for the package and do something less enjoyable than watching your new channels

media type="youtube" key="3HSY94QVIss&hl=en&fs=1" height="344" width="425" The HMS Barham is your past cost. Its cost cannot be reversed or recovered to a significant degree. Its time to move on and build another ship. one ship being sunk does not indicate that the ship-making company should stop making boats. instead they need to leave the past in the past and move on. they should accept the sunk cost of the ship going down and go on doing what is most profitable. For more about sunk costs, go to: http://www.investopedia.com/terms/s/sunkcost.asp or http://en.wikipedia.org/wiki/Sunk_costs or http://www.answers.com/sunk%20costs For more ships being blown to hell, try http://www.youtube.com/watch?v=BSBNG7IFyKU&feature=related or http://www.youtube.com/watch?v=Z60542-r6wc&feature=related

when making decisions with regards to economics one must continue on forward focusing solely on the present and the future. any mistakes or unfortunate situations of the past must be left in the past. they are sunk costs, and failure to ignore them will result in poor decisions.

To test your newly acquired knowledge, answer the following question: If you spend $30 million building a new factory, and an additional $10 million would be required to finish the job, but you could build a new factory from beginning to end (exact same as the current factor in progress) in a different location for a total of $7 million, should you: A) Finish the current factory B) Abandon the current project and go with the new alternative

scroll down to find the answer

The answer is B. Abandoning the current project may seem wasteful, but it is the most economically efficient option presented. This is because no matter what option you choose, you have already spent $30 million on the current factory, and by abandoning you save $3 million, whereas finishing it would be a more expensive and therefore economically irrational option.