In the language of decision trees, it requires the agent's choice at a particular choice node to be independent of unreachable parts of the tree. Separability requires agents to take decisions by comparing the available options in eventualities that can still occur, uninfluenced by how the current situation was reached or by eventualities that are precluded by that history. ![]() The bygones principle can also be formalised as the notion of "separability". Past decisions-including sunk costs-meet that criterion. ![]() Expected utility theory relies on a property known as cancellation, which says that it is rational in decision-making to disregard (cancel) any state of the world that yields the same outcome regardless of one's choice. The bygones principle is grounded in the branch of normative decision theory known as rational choice theory, particularly in expected utility hypothesis. This is known as the bygones principle or the marginal principle. Conversely, as a rational actor, if the value projection falls to $75 million the company should continue the project. Thus, if a new factory was originally projected to yield $100 million in value, and after $30 million is spent on it the value projection falls to $65 million, the company should abandon the project rather than spending an additional $70 million to complete it. In other words, people should not let sunk costs influence their decisions sunk costs are irrelevant to rational decisions. They may be described as "water under the bridge", and making decisions on their basis may be described as "crying over spilt milk". Any costs incurred prior to making the decision have already been incurred no matter what decision is made. The only things that matter are the future consequences. At any moment in time, the best thing to do depends only on current alternatives. Even though economists argue that sunk costs are no longer relevant to future rational decision-making, people in everyday life often take previous expenditures in situations, such as repairing a car or house, into their future decisions regarding those properties.Īccording to classical economics and standard microeconomic theory, only prospective (future) costs are relevant to a rational decision. In other words, a sunk cost is a sum paid in the past that is no longer relevant to decisions about the future. ![]() Sunk costs are contrasted with prospective costs, which are future costs that may be avoided if action is taken. In economics and business decision-making, a sunk cost (also known as retrospective cost) is a cost that has already been incurred and cannot be recovered. For the Better Call Saul episode, see Sunk Costs ( Better Call Saul).
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