Sunk cost is a term used in economics and business to describe an expense that has already been incurred and cannot be recovered. These costs are often referred to as “retrospective costs” because they represent money, time, or effort spent in the past that is irretrievable.
IMPORTANT! Sunk costs should be irrelevant when making future decisions.
Decisions about whether to continue a project or investment should only be based on prospective costs (future costs that can be avoided) and future benefits.
While the concept of sunk costs dictates that they should be ignored in future decisions, human behavior often deviates from this principle. This common cognitive bias is known as the sunk cost fallacy.
