Sunk costs should be ignored in decision making.

Sunk costs should be ignored in decision making.

• A. True
• B. False
• C. Only for short-term decisions
• D. They should be ignored in decision making

Answer: (D)

When deciding between options, focus on future costs and benefits, not what’s already been spent. Sunk costs are past expenditures that can’t be recovered, so they shouldn’t influence current choices. If you tried to base a decision on money already spent, you’d be letting past actions drive present strategy, not the likely future outcomes. The rational approach is to compare only the incremental cash flows that will result from each option. For example, if you’ve already spent money on developing a product, but market data now suggests continuing would yield poor future payoffs, you should still evaluate the decision based on future costs and revenues, not the sunk development cost. Continuing just because you’ve spent a lot would illustrate the sunk-cost fallacy, leading to worse results. That’s why the guidance here is that sunk costs should be ignored in decision making—the statement directly captures the proper practice. The other choices either imply sunk costs have a role (which isn’t correct) or limit the principle to some situations (which isn’t accurate).

When deciding between options, focus on future costs and benefits, not what’s already been spent. Sunk costs are past expenditures that can’t be recovered, so they shouldn’t influence current choices. If you tried to base a decision on money already spent, you’d be letting past actions drive present strategy, not the likely future outcomes. The rational approach is to compare only the incremental cash flows that will result from each option.

For example, if you’ve already spent money on developing a product, but market data now suggests continuing would yield poor future payoffs, you should still evaluate the decision based on future costs and revenues, not the sunk development cost. Continuing just because you’ve spent a lot would illustrate the sunk-cost fallacy, leading to worse results.

That’s why the guidance here is that sunk costs should be ignored in decision making—the statement directly captures the proper practice. The other choices either imply sunk costs have a role (which isn’t correct) or limit the principle to some situations (which isn’t accurate).