What does “sunk cost” mean?

The term “sunk cost” refers to a cost that has already been incurred and cannot be recovered or undone, regardless of any future action taken. In other words, it is a cost that has already been paid and cannot be refunded or reversed.

Sunk costs are a common concept in economics and business decision-making, where they are often used to evaluate the costs and benefits of different options. For example, if a company has already invested a significant amount of money in a project that is not performing well, the sunk costs associated with that project should not be considered when deciding whether to continue or abandon the project. Instead, the decision should be based on the potential future costs and benefits of continuing or abandoning the project, independent of the sunk costs already incurred.

The term “sunk cost fallacy” refers to the tendency of people to continue investing in a project or decision based on the sunk costs they have already incurred, even if it no longer makes rational sense to do so. This can lead to poor decision-making and financial losses.