What is Sunk Cost? ...and the Sunk Cost Fallacy?

The video tutorial explains the concept of sunk cost, which refers to past investments that cannot be recovered. It highlights the sunk cost trap, a common fallacy where individuals make decisions based on past investments rather than future benefits. An example involving a prototype product is used to illustrate this trap. The tutorial emphasizes the importance of focusing on future costs and benefits in decision making, rather than being influenced by irrecoverable sunk costs. It also explores the psychological factors that contribute to the sunk cost trap, such as emotional and political investments.

What is a sunk cost?

• A cost that can be recovered

• A future investment

• An irrecoverable past investment

• A cost that influences future decisions

What is the sunk cost trap?

• Making decisions based on future benefits

• Investing in new projects without analysis

• Considering past investments in future decisions

• Ignoring past investments in decision-making

In the prototype example, why is it a mistake to spend $50 to complete the project?

• Because the project is already successful

• Because the $1 million investment can be recovered

• Because the $50 will not bring additional value

• Because competitors have inferior products

What should be the focus when deciding to invest an additional $50 in the prototype?

• The competitor's market position

• The emotional commitment to the project

• The potential to recover the $50

• The amount already invested

What is the main reason people fall into the sunk cost trap?

• Emotional and political investments

• Lack of financial resources

• Overconfidence in future success

• Insufficient market research

How can one avoid the sunk cost trap in decision-making?

• By ignoring all financial data

• By considering past investments

• By focusing on future costs and benefits

• By investing more in the current project

What is the benefit of starting from a blank slate in project decision-making?

• It ensures past investments are considered

• It allows for better evaluation of new investments

• It guarantees project success

• It reduces emotional commitment