SUNK COST BIAS

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what is cost? what is sunk cost? what is sunk cost error in decision making process? what happens in sunk cost error? what is it example? how to eliminate it?

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HCBF, PU, Lahore 1

SUNK COST Error:

HCBF, PU, Lahore 2 SUNK COST Error " When you find yourself in a hole, the best thing you can do is stop digging .“ (Warren Buffet)

What is SUNK COST?:

What is SUNK COST? Cost: An amount that has to be paid or given up in order to get something. SUNK COST Sunk cost relates to past investments that are now irrecoverable. OR Sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered . Example: Suppose you pre-ordered a non-refundable ticket to a cricket game. However, on the night of the game, you simply don’t feel like going anymore: you’re tired, and the game will be televised. You regret the fact that you bought the ticket because, you would prefer to stay at home and comfortably watch the game on TV. So it is an example of sunk cost beard by you because it is not refundable and you also cannot sale it. refund it and nor sell it. HCBF, PU, Lahore 3

What is SUNK COST Error in DECISION MAKING?:

What is SUNK COST Error in DECISION MAKING? When a manager forgets that his current action or decision cannot influence past events and relate only to future consequences , it is said to be a sunk cost Error. HCBF, PU, Lahore 4

What Happens in Sunk Cost Error:

What Happens in Sunk Cost Error Manager thinks his decision or action is good and recoverable but he forgets or does not analyze that such decisions or actions is not good and recoverable but also it may harmful . Decision makers forget that current choice cannot correct the past. They incorrectly fixate on past expenditure of time, money, or effort in assessing choices rather than on future consequences. HCBF, PU, Lahore 5

Example on SUNK COST Error:

Example on SUNK COST Error Concorde Supersonic Airplane The Concorde supersonic airplane is often cited as an example of sunk cost Error . It became obvious early on that the Concorde was very costly to produce and, with few seats, was unlikely to generate adequate revenue . Few orders for planes were coming in. Still, even though it was clear that plane failed any market potential after a freak accident that killed 113 people but was not due to design flaw. The project got a bad name and was doomed. But still France and England continued to invest in this plane. HCBF, PU, Lahore 6

How to ELIMINATE on Sunk Cost Error:

How to ELIMINATE on Sunk Cost Error Following steps will be helpful to overcome on Sunk Cost Error: Ask yourself what another manager would do in your place , one without a prior history in the investment . Avoid creating a mistake-fearing culture within your organization . Set an example by admitting when you are wrong. Change course quickly without regard to the sunk costs of investments that have gone bad. Try thinking of the sunk cost not as an investment that was wasted , but as an investment that (perhaps indirectly) led to valuable information indicating that a course change is needed. In last Follow the advice of Warren Buffet : "When you find yourself in a hole, the best thing you can do is stop digging." HCBF, PU, Lahore 7

SUNK COST BIAS IN DECISION MAKING FINISHED:

Presentation Prepared By: Muhammad Usman Saeed Roll No. m11mba 074 MBA (B&F)1 st Semester HAILEY COLLEGE OF BANKING & FINANCE, UNIVERSITY OF PUNJAB, LAHORE, PAKISTAN HCBF, PU, Lahore 8 SUNK COST BIAS IN DECISION MAKING FINISHED

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