Sunk Cost

What Is Sunk Cost?

A sunk cost is an expense that has already been incurred and cannot be recovered, regardless of what one chooses to do next. Because rational decisions should weigh only future costs and benefits, sunk costs are irrelevant to them. The sunk cost fallacy is the error of continuing to invest in a losing course of action because of resources already spent, rather than judging the decision on its future costs and benefits. A person who keeps pouring money into a failing project because so much has already been spent is committing this fallacy. Sound marginal analysis asks only whether the next dollar or hour will bring benefits worth its cost.

Why It Matters

The sunk cost fallacy is one of the most common and costly reasoning errors in business and everyday life, which is why economists emphasize it. Money already spent on a non-refundable ticket, a stalled construction project, or years invested in the wrong strategy feels like a reason to continue, but it is not, because those resources are gone whatever happens next. Recognizing sunk costs frees decision-makers to evaluate options on their forward-looking merits, using marginal analysis: take the next step only when its marginal benefit is at least as large as its marginal cost. Ignoring sunk costs is essential to avoid throwing good money after bad and to allocate scarce resources toward their most valuable future uses.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What is the "sunk cost fallacy"?
  Continuing to invest in a losing course of action because of resources already spent, rather than judging future costs and benefits
• What is a "sunk cost," a concept often relevant to spending decisions?
  A cost already incurred that cannot be recovered, and shouldn't factor into future decisions