in this video we're going to discuss the
concept of sunk costs so a sunk cost is
two things it's a cost that number one
has already been incurred it's already
incurred and that means you've already
invested the money you already spent the
money it's it's gone so you've incurred
it and it can't be changed going forward
so really you've you've invested the
money you can't go back there's nothing
that can be done so for these two
reasons which we're about to see in a
moment a sunk cost is irrelevant to
decision making right here relevant to
decisions why well if the money's gone
the money's been spent it's already
incurred and we can't change it we can't
do anything about it so it shouldn't be
affecting our future decisions now let
me just walk you through an example and
you'll see in a moment why this is the
case so let's say an example is you pay
$10 for a movie ticket and maybe let's
say that the movie that you wanted to
see was was sold out so you pay $10 for
some other movie that you really don't
want to see as much then you show up at
the movie theater and somebody offers
you a free ticket to a movie that youth
you what you you really want to see you
would prefer to see this movie that
you've got the free ticket for right now
if you start thinking hey wait a minute
I've got this ten I've already paid ten
dollars for this other movie I should
probably see that well actually research
has shown that a lot of people will
actually go and see the movie that
they've already paid money for even
though they think that they would like
it less than the one they're being
offered a free ticket for and that's
because even though it's a sunk cost in
that it's already been incurred we've
already paid the ten bucks it's lost
we can't change that people allow this
to affect their decision making
right they have Kondos idea of well I
don't want to be losing money I don't
want to have wasted ten dollars for
nothing so even though they've
got these two options and they know that
they would like option number one or
excuse me option number two better than
option number one they will sometimes
still choose number one because they're
kind of letting this sunk cost this cost
that should be irrelevant affect their
decision-making now you might say okay
well this is just you know going to the
movies how is this important to to the
business world or to real life well
sometimes what you'll have happen is
let's say there's a firm that's invested
a hundred million dollars in a project
there's got this ongoing project and it
looks like this project is just not
going to be a success there's there's
problems it's just been a nightmare from
the beginning and they should just pull
the plug right but they're reluctant to
pull the plug sometimes because they say
well wait we've already invested a
hundred million dollars in this we
should keep pushing forward now okay so
obviously you don't want to just invest
a hundred million dollars in something
and have one problem come up and you say
okay let's forget about the money but if
you come to believe that okay this is
not going to be successful or there's a
very good likelihood not be successful
and actually this we should deploy our
future money elsewhere but you continue
along with this other project because
you say well look we've already invested
100 million then what you're doing is
you're allowing a sunk cost to affect
your decision-making and you shouldn't
what happened here this hundred million
dollars that's gone all you care about
is the future right how do we affect the
firm positively going forward from here
and because this is sunk right we're not
getting that money back it's gone and
whether we continue to throw money into
this project isn't going to change the
fact right so we have to say okay from
this point going forward into the future
what's the best decision in doing so we
have to ignore sunk costs that are
irrelevant and we shouldn't allow them
to affect our decision making