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What is a Sunk Cost?

A sunk cost is money that has already been spent and cannot be recovered, such as a non-refundable deposit or past research spending. Because it cannot be changed by any future decision, it should be ignored when choosing between future options. Only future costs and benefits matter for a rational decision.

The classic trap is the sunk cost fallacy: continuing with a failing project because so much has already been invested. The money is gone whether the business continues or stops, so it should not enter the calculation. What matters is only whether the future returns justify the future costs.

The distinction matters in everyday business. A deposit already paid, a machine already bought, or a year of development already completed are all sunk. When deciding whether to keep going, the honest question is forward-looking: will spending more produce more value, or is the extra money better used elsewhere? Looking backward at past spend leads to throwing good money after bad.

Example

A company has spent €30,000 developing a feature that is now unlikely to succeed. The €30,000 is sunk. The real decision is whether the future cost to finish it is justified by its future value, not whether the €30,000 should be recouped.

Questions

Why should sunk costs be ignored in decisions?

Because they cannot be recovered and no future choice changes them. Including them biases the decision toward continuing a losing course, which is the sunk cost fallacy. Only future costs and future benefits should guide the choice.

What is the sunk cost fallacy?

It is the tendency to keep investing in something because of what has already been spent, even when stopping is the better decision. The rational approach is to ignore the past spend and evaluate only whether future returns justify future costs.

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