Sunk Cost and Decision Making

Decision making is an important process that is involved in any business, and there are many kinds of decision making processes that people in the business industry can do to ensure that they are able to get the right decision made for their company. One of the decision making process that people in the business industry are trying to use is sunk cost. This type of decision making is known as a retrospective or past cost that has already been incurred and there are no ways on how it can be recovered.

Sunk Cost Explained

Sunk cost is different from other types of business costs that can still be incurred in the future like R&D expenses and also inventory costs. Most of the time, this kind of business cost is independent no matter what event or condition that a business may encounter in the future.

When dealing in the business making process, organizations and individuals involved in the business would only think about the possible future costs that they can get from the certain strategy that they may follow or implemented within the business. An example of this business decision is spending $10 million for the construction of a building. If the building is not yet complete, the company or the business that is liable for the construction of the building should consider thinking that the investment that they have allotted will sunk. This is for the main reason that it is impossible for them in getting their money they have invested or allotted back.

The said example would result to the people involved in the business to decide whether they should be continuing the construction to get the money back or just end all transactions with the construction of the incomplete project and walk away without getting back the investment. This may be a tricky part since the company should be releasing added investment with the project just to continue the construction if they really want to get the project done.

How Sunk Cost Impacts Business

Other than the money, sunk cost decision making can also be used when talking about time. There are many people who tend to waste time starting a particular thing that they are interested in at first and then waste all of the time spent when they realize that it is not as worthy as how you are expecting it to be. Say, you are starting to put up a business. It is necessary that you will not only focus your time and money with just putting it up and not making it take off. This is a situation wherein you are wasting not only your money but your time as well. Instead of starting to get the revenue from the capital that you have invested, you are wasting your time preparing too much for the startup itself.

Somehow, this kind of decision making can be helpful for some people to consider thinking about the possible things that may happen if they are not able to make the most out of the money and time they have invested. With all of these thoughts, you are sure to learn something from considering this type of decision making.

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