what is sunk cost

A sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are different from prospective costs, which are future costs that may be avoided if action is taken. Examples of sunk costs in business include marketing, research and development costs, and machinery and equipment costs. Economists suggest that, in theory, sunk costs are not relevant to future decision-making. However, in practice, sunk costs can significantly influence decisions about the future because it is psychologically challenging to let go of previously invested time, effort, or financial resources even if the outcome of those investments fails to meet expectations. The sunk cost fallacy is the belief that additional investments should be made in an activity, or else earlier investments in it would have been wasted.