Sunk costs are never relevant in decision making.

Question

BlackTom AI · Accepted Answer

Question restated: Sunk costs are never relevant in decision making.
Option 1: true
Option 2: false

Analysis of Option 1 (true): This statement aligns with standard economic and managerial decision-making principles. A sunk cost is a cost that has already been incurred and cannot be recovered regardless of future actions. Because it cannot be changed by any future decision, it should not influence rational decision-making. Treating sunk costs as relevant leads to worse outcomes, such as continuing an unprofitable project to “recover” past spending rather than evaluating future costs and benefits.

Analysis of Option 2 (false): If one asserted that sunk costs can be relevant, they would be implying that past expenditures should influence future choices. This contradicts the core concept of a sunk cost, which is irrecoverable and not alterable by any planned action. Relying on sunk costs can cause the sunk cost fallacy, where past investments unduly bias ongoing decisions even when future prospects do not justify them.

Additional nuance: Decision-making typically focuses on marginal costs and benefits that will occur going forward. Sunk costs do not alter the incremental payoff of alternative options, so they are excluded from rational analysis. However, in some real-world contexts, people mentally account for past costs due to emotions or accountability concerns, even though it is not economically sound to do so.

Summary of reasoning: If evaluating decision-relevant information, only future costs and benefits matter; past, unrecoverable expenditures do not change the outcome of future options. Consequently, the statement that sunk costs are never relevant in decision making is consistent with normative economic thinking, while the alternate claim would rely on a flawed interpretation of what counts as decision-relevant information.

ACTG-2300-4 Chapter 13 PreClass Work

Sunk costs are never relevant in decision making.

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