Resolving the Sunk Cost Apory

• In Event: Speaking of Management Issues…

Abstract

Sunk costs form a key part of the decision-making component of the management accounting
literature. Generally stated, the proffered lesson about sunk costs is that since current or future
actions cannot change sunk costs, decision makers should ignore them. Thus, ongoing fixed
costs or previously incurred sunk costs, while relevant for such matters as costing, income
determination, and performance evaluation are irrelevant for most short- and long-term
decisions. However, the organizational behavior literature indicates that sunk costs affect
decision makers’ actions—especially their emotional attachments to the related project and the
asymmetry of attitudes regarding the recognizing of losses and gains. Called the sunk cost effect
or sunk cost fallacy, this conflict in sunk costs’ underlying nature reflects one element of
incoherence in contemporary accounting discourse. We discuss this sunk cost conflict from an
accounting and a philosophical perspective in order to elucidate the ambiguities that decision
usefulness introduces into accounting discourse. We also show how reporting committed costs
could help decision makers clarify some economic implications regarding sunk costs.

Author

• Alan Reinstein, Wayne State University