ABSTRACT
In making strategic decisions, it's important to understand the nature and implications of different types of costs. One of the most important concepts is that of sunk costs; essentially, these are costs that cannot be recovered and should not be considered in the decision-making process. Here is an example: You buy a non-refundable airline ticket for the sole purpose of visiting an old friend in Seattle. Just before your trip, however, your friend is relocated to Miami. What do you do now? It's easy to say to yourself, “Well, I bought the ticket and it's non-refundable, so I might as well use it.” In reality, however, the ticket purchase is a sunk cost, and taking the trip will incur further expenses that have nothing to do with the original purpose of your trip. It would be better to save these unrelated expenses even though it means accepting the loss of the plane fare. It's not easy to write off sunk costs, but it is often critical.
