Sunk Cost

Once a cost has been incurred and cannot be recovered, it should not influence future choices. Only future costs and benefits that differ between the options are relevant.

For example, a company has spent 20,000 researching a new product. New information shows the product will lose money. The 20,000 is gone whether the company continues or stops, so it should be ignored. The decision should depend only on whether future revenues will exceed future costs.

In practice, people often struggle to ignore sunk costs. This tendency is called the sunk cost fallacy. It leads people to keep investing in failing projects because they have "already put so much in", to stay in bad investments to avoid admitting a loss or to finish a meal they no longer want because they paid for it.

Businesses can fall into the same trap, continuing projects long after they should be stopped because of the money already spent and the reputations attached to them.

Recognising sunk costs helps people and organisations make clearer decisions, focusing on what will happen from now on rather than on what cannot be changed.