Sunk Cost

Meaning & Definition

A sunk cost, also known as a retrospective cost, is an expenditure that has already been made but cannot be recovered. Marketing, research, new software installation or equipment, wages, benefits, or facility charges are examples of sunk costs in the company. Opportunity costs, on the other hand, are the missed returns on resources that might have been spent elsewhere. Sunk costs, in principle, are irrelevant to future decision-making. In actuality, sunk costs may and do have a substantial impact on future choices. This is partly due to the psychological difficulty of letting go of previously spent time, effort, or money resources, even if the results of such investments fall short of expectations.

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