Sunk Cost | Leis Network

The Concorde fallacy: a monetary sunk cost boondoggle

Definition of sunk cost

Costs that can not be recovered after they are spent. Most ‘expenses’ are sunk costs.

Sunk costs like advertising and marketing are often expensive and can never be resold or recouped. To the extent they build brand awareness and add knowledge to the organization, they act as barriers to entry to would be competitors who may not wish to spend so much.

On the other hand, it can be argued that at least some advertising expenditures are not sunk costs if they build a brand. Since purchasers of the product line would pay at least something for the market share over and above the product design and machinery needed to produce it, then the advertising has some residual value.

The Concorde fallacy

The Concorde supersonic jet began as a fiscal disaster and never recovered. In 1956 the British government created a committee composed of representatives of airlines and manufacturers of aircraft and their engines. Soon after, they produced a report calling for the development of a long range 150-passenger aircraft capable of cruising at 1200 mph.

It was asserted that the development costs would be between £78 million and £95. It was also asserted that there would be a market for 500 of the long range SST planes by 1970. Apparently these figures were simply made up by the Royal Aircraft Establishment at Farnborough. To see how far off they were, note that by 1980 the costs of development mounted to two billion pounds and the number of Concorde SST’s manufactured was only 16 and of these only nine were sold. All of these nine were purchased by the state-owned airlines of Britain and France, British Airways and Air France.
Source: The Concorde Supersonic Transport

By 1973 the costs for the development of the Concorde SST had risen from the £150-170 million range to £1065 million.

At that time the estimated cost of a Concorde SST was taken to be £6 million. Since the price of a Boeing 707 was £2 million it was clear that the Concorde sales would either be negligible or the Concorde would have to sold at a loss. The Minster of Aviation had said, “Space beckons us with a golden finger.” Lord Brabazon in the House of Lords replied, “My Lords, it beckons us with the three brass balls of the pawnbroker.”
Source: The Concorde Supersonic Transport

Over the years, it became increasingly clear the jet would never make a return on its investment, regardless of its safety or speed. Nevertheless the governments pressed on, arguing they had already invested a lot of money and that the Concorde would become a shining example of government prowess and know-how.

The British and French government Concorde partnership never made more than 20 Concordes (some estimate taxpayer cost was $1 billion per plane), and even after ignoring research and development costs, the airlines that purchased them flew them at a loss except for several routes. To add insult to injury, while the cost was borne by the taxpayer, it was only the rich and politically connected who could afford to fly on it; as effective a wealth transfer from the poor to the rich as has ever been witnessed.

The boondoggle that is the Concorde is such an extravagant example of misuse of funds and neurotic thinking that it obtained its own name for sunk cost run amok: “the Concorde Fallacy.”

Other sunk cost examples

Sitting through a bad movie just because you paid for it is another example where sunk costs should be ignored. Watching the movie will not bring your money back or make it more worthwhile. On the contrary, sitting through the movie precludes spending time on more fruitful pursuits, which adds insult to injury.
You execute a marketing campaign that yields dismal results. In response, you implement an A/B test with only marginal improvement. Further iterations do not show significant gain. Stop beating the dead horse and go back to the drawing board.
You are sitting in the lush interior of the Bellagio in Las Vegas, drinking free daiquiris and playing the slot machines. Unfortunately, the $100 in coins have produced only monetary failure so far. The good news is that all that failure is really an investment. The machine is due to pay off and requires only patience, an iron if not slightly inebriated will, and more dollar coins. Yeah right!
The bills are piling up. You stare out at the pool and think of the half finished bathroom that you no longer have funds to renovate. The market has dived, your new job does not allow for renovations, and you are $100,000 in the hole. Sell the house and move on.

The motto for sunk cost is, “Do not throw good money after bad.”