Sunk cost dilemma

The sunk cost dilemma has been described by Oliver F. Lehmann as a situation in a one-player game (like jigsaw puzzles, sudoku, solitaire, Rubik's Cube, slot machines) which consists of a sequence of good decisions that finally lead to an overall disaster.

The sunk cost dilemma can be described using concepts from game theory and decision theory and is a common reason why projects run into crisis.

The situation is that of a project in which consecutive decisions have to be made: whether to start the project in the first place, and then whether to continue it. Each time the decision has to be made, the strategy of going ahead with the project is dominant, i.e. has the highest payoff, which remains always positive. But in the end, the overall payoff of the project is negative. While the project progresses towards disaster, the decision not to go on with the project gets more and more unlikely.

The calculation of the payoff for each decision is:

:Payoff_d = Project revenue - Open costs

while the calculated project payoff gets smaller.

As decisions are only made considering open costs but not sunk costs, each single decision is computed to be beneficial. The project is like a train: once it has been put on a track, it is very difficult to change its direction.

References

*Oliver F. Lehmann at Visionary Tools: [http://www.visionarytools.com/decision-making/sunk-cost-dilemma.htm The Sunk Cost Dilemma] .
* [http://www.eddielogic.com/?p=45 Article - Strategies and their problems in practice]