Don't give inappro **Why Should Sunk Costs Be Ignored for Decision Making?**Sunk costs refer to past expenses that have already been incurred and cannot be recovered. From an economic and decision-making perspective, it is vital to ignore these costs when making decisions about future actions. The primary reason is that sunk costs are independent of any future outcomes. Decisions should be based on prospective costs and benefits, not on the unrecoverable costs of the past.**Example to Illustrate the Concept**Imagine a company that has invested $1 million in the development of a new software product. However, after extensive R&D, market analysis reveals that continuing with the project will not be profitable. Despite the significant investment, the company should consider abandoning the project if the expected returns do not justify further investment. If they continue, they're at risk of falling into the "sunk cost fallacy," where past investments unduly influence future decisions.**Why Ignoring Sunk Costs is Challenging**Ignoring sunk costs is difficult because of human psychology. People tend to exhibit a cognitive bias known as "loss aversion," where the pain of losing something is psychologically twice as powerful as the pleasure of gaining something. This bias can compel individuals and organizations to continue investing in a failing endeavor simply because substantial resources have already been spent. Overcoming this bias requires a disciplined approach to focus strictly on future costs and benefits.

Sunk cost refers to costs that have already been spent and cannot be recovered. These costs should…

Answered: Why should sunk costs be ignored for…

Why should sunk costs be ignored for decisio making? Give an example of why it makes se to ignore sunk costs and why it is often difficu do so.

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter21: Production And Costs

Section: Chapter Questions

Problem 14QP

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Don't give inappro

**Why Should Sunk Costs Be Ignored for Decision Making?**

Sunk costs refer to past expenses that have already been incurred and cannot be recovered. From an economic and decision-making perspective, it is vital to ignore these costs when making decisions about future actions. The primary reason is that sunk costs are independent of any future outcomes. Decisions should be based on prospective costs and benefits, not on the unrecoverable costs of the past.

**Example to Illustrate the Concept**

Imagine a company that has invested $1 million in the development of a new software product. However, after extensive R&D, market analysis reveals that continuing with the project will not be profitable. Despite the significant investment, the company should consider abandoning the project if the expected returns do not justify further investment. If they continue, they're at risk of falling into the "sunk cost fallacy," where past investments unduly influence future decisions.

**Why Ignoring Sunk Costs is Challenging**

Ignoring sunk costs is difficult because of human psychology. People tend to exhibit a cognitive bias known as "loss aversion," where the pain of losing something is psychologically twice as powerful as the pleasure of gaining something. This bias can compel individuals and organizations to continue investing in a failing endeavor simply because substantial resources have already been spent. Overcoming this bias requires a disciplined approach to focus strictly on future costs and benefits.

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