A poker player calls a large bet early in the hand and another large bet later in the hand. At the end of the hand, her opponent makes a small bet. The poker player is almost positive that her opponent has superior cards, but she decides to call the small bet anyway, reasoning that she cannot fold because she has already invested so much money in the hand. The poker player's reasoning error is analogous to a manager violating which of the following principles of cash flow estimation?

Question

Quizplus · Accepted Answer

The poker player is making the error of considering her previous bets as a sunk cost in her decision-making, which is similar to violating the principle that sunk costs should not be considered when evaluating a project. Just as the poker player should only consider the current situation and not her previous investments in the hand, a manager should only consider the incremental cash flows of a project and not any sunk costs that have already been invested.

A Poker Player Calls a Large Bet Early in the Hand