Sunken costs

In the financial sector are sunk costs ( english cost sunk ; often referred to as irreversible costs or casually as EDA or Eh-da-cost referred) costs that have already been incurred and can not be undone (for example, by sales).

This includes both costs that have already resulted in payouts and future costs that will be irrevocably incurred. Their central feature is that they can no longer be influenced in the present or in the future - hence the term "sunk" or "sunk" (sunk).

Since sunk costs exist regardless of which option a decision maker chooses, they must not be taken into account in a rational decision between alternative courses of action and thus represent costs that are irrelevant to the decision .

Ex ante approach

Costs that turn out to be irreversible costs in a later decision-making situation ( ex post ) may have shown decision- relevant costs in an earlier decision-making situation, especially before they were incurred ( ex ante ) .

Example: Two telecommunications companies A and B vie for a national fixed line market; Provider A already has a telephone network, while provider B has yet to set up one. For B, in contrast to A, the costs of building the network are relevant to the decision, which is why B is more likely to leave the market than A. Irreversible costs are therefore seen in competition theory as an important reason for the formation of monopolies .

Sunken costs and rational behavior

Since individuals do not always follow the rationality postulate of Homo oeconomicus , irreversible costs are often used as an opportunity to continue unprofitable activities because so much has already been invested in these activities - from a rational point of view, unjustifiably. Thus, irreversible costs can falsify the decision-making process that is economically optimal (from the point of view of the decision maker). The phrase " throwing good money after bad " refers to such behavior .

Although bad money should not be thrown after good money, this does not mean that bad investments that have led to irreversible costs can therefore simply be forgotten. They appear on the company's balance sheet, lead to losses and a thorough review and reflection of how such wrong decisions came about is always required.

Differentiation from perpetual costs

There are parallels, but also clear differences, to the concept of perpetual costs . The latter are follow-up costs that z. B. after the end of mining or the use of nuclear power will arise or remain, and will arise at least for a long time. Perpetual costs, however, are only partially sunk costs - if they are also incurred if a mining facility or a nuclear power plant continues to operate . In this case, they are lost in the sense that their trigger is in the past and they cannot be undone. Examples of this are the costs for the continuous pumping of groundwater, expected costs for damage to structures caused by subsidence or the final storage of fuel elements.

Perpetual costs that have not been sunk are, for example, costs for the renaturation of an open-cast mine landscape, since these costs are not inevitable, but only arise in the event of the plant being shut down. As a result, they are relevant to the decision-making and therefore not sunk.

Examples

Sunk costs can arise if the forecasts made during planning (e.g. an investment project ) (e.g. about the sale of products or the amount of costs) do not come true when it is implemented. The expenses initially made then represent sunk costs, since they can no longer be reversed and therefore cannot be influenced by future decisions.

In the case of larger projects implemented in several sub-sections (e.g. transport projects), preliminary construction work is sometimes created for any further sections when the first sections are implemented . The expenditures for these preliminary work represent sunk costs.

Product launches on the market are often associated with high costs. If the product flops, one should not include the costs already invested in the decision (leave the product in the market or withdraw it), but only orientate oneself on the future possibilities.

Stock market investors geared at selling decisions often because at what price they have a shares bought. The price at which one entered in the past is, however, irrelevant for the assessment of the development of the stock in the future.

literature

Schaub, Harald (1997): Sunk Costs, Rationality and Economic Theory . Schäffer Poeschel, Stuttgart 1997. ISBN 3-7910-1244-4
John Sutton: Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration . Mcgraw Hill Book Co; Edition: 1st MIT Press Pbk. Ed (September 30, 2007). ISBN 978-0262693585