Question

What is a "sunk cost"? How is a sunk cost related to the phrase "don't cry over spilt milk"?

Answer 1

A sunk cost is a cost incurred by an individual and can no longer be recovered. Sunk costs should not be taken into account when deciding to continue investing in an ongoing project, as these costs can not be recovered. Instead, consideration should be given to only relevant costs. Nonetheless, due to the sheer size of the sums already spent in previous periods, most executives continue to invest in ventures. By curtailing a venture that appears to be unprofitable, they don't want to "lose the money," so they continue to pour more cash into it.

The best thing to do at any time depends entirely on the existing alternatives. Future consequences are the only things that matter.Past mistakes are irrelevant. No matter what decision is made, all costs incurred before making the decision have already been incurred. They can be described as "water under the bridge," and decision-making on their basis can be described as "crying over spilled milk." In other words, people should not allow their decisions to be affected by sunk costs; sunk costs are insignificant to rational decisions. This is known as the rule of bygones or the conditional principle

In folk wisdom and other contexts, the notion of the irrelevance of sunk costs is all around us. Good poker players, for example, understand the idea when they say, "Don't throw good money after bad." Sometimes inexperienced players will think, "Well, I've already bet five dollars on that hand, so I could see it through." Good poker players know this is bad thinking: what matters is if your hand is worth making the next bet. That you have already bet five dollars is next to the line. Bygones also passed away. The toothpaste can't be put back in the tube. There is no crying about milk that has been spilled.