Definition of Sunk Cost Dilemma

It is a state of confusion in making deciding whether to proceed with or not with a project when time and money have already been spent but the desired results have not been achieved. In order to resolve the sunk cost dilemma, evaluation needs to be done whether further investment would be good or not.

Explanation of Sunk Cost Dilemma

Investors usually face such a difficulty when market conditions change dramatically in the middle of a project.

For example, if you decide halfway through painting your house that it doesn’t look nice to you, you have a sunk cost. You cannot undo the paint that has already been done. The dilemma is whether to paint rest of the house in same color or remove it and paint it again from scratch again that will obviously involve more money and time.