A situation that is always ignored...SUNK COST

What is a Sunk Cost?

A sunk cost, sometimes called a retrospective cost, refers to an investment already incurred that can’t be recovered. Examples of sunk costs in business include marketing, research, new software installation or equipment, salaries and benefits, or facilities expenses. By comparison, opportunity costs are lost returns from resources that were invested elsewhere.

Economists suggest that, in theory, sunk costs are not relevant to future decision-making. In practice, however, sunk costs can and do significantly influence decisions about the future. This is largely because it’s psychologically challenging to let go of previously invested time, effort, or financial resources even if the outcome of those investments fails to meet expectations.

What is a Sunk Cost Fallacy?

A sunk cost fallacy is often simplified to the idea of throwing good money after badwhile refusing to cut one’s losses.

Jim Semick, Co-Founder of ProductPlan, explains it this way:

“In sunk cost theory, we will often decide to stay with something because we’ve put time or resources into it. We believe that because we have ‘sunk’ that cost into it, we somehow need to recoup it. That’s a fallacy.”