Dollars, Sense, and Sunk Costs: A Life Cycle Model of Resource Allocation Decisions

Abstract

Decisions as to whether to cut off a losing enterprise (clouded by what already has been invested in the venture) may be facilitated by a new model proposed here—the life cycle model. The model, borrowing an accounting measure (the time adjusted rate of return) to describe the effect of “sunk costs” on the expected rate of return for future costs in a project, is used to examine the relevance of negative feedback to the decision to commit further resources to completion of a project.