A Sunk Cost is a cost that is incurred and can not be meaningfully recovered by any practical means.1 For example, a business may have invested a million dollars in new hardware. This money is now gone and cannot be recovered, so it shouldn’t figure into the business’s decision-making process.2 These costs are excluded from future business decisions, because costs will be the same regardless of the outcome of a decision.3 This may be termed sunk cost trap – when an organization irrationally follows through on an activity that is not meeting expectations due to time and money already spent on it, rather than cutting their losses and making a decision that will give them better outcomes going forward.
When making an informed decision, organizations should consider the costs that are a result of the decision (relevant costs); sunk costs that do not change should not be considered.3
Next: Endowment effect
1 https://www.accountingtools.com/articles/what-is-a-sunk-cost.html.
2 http://www.lifehack.org/articles/communication/how-the-sunk-cost-fallacy-makes-you-act-stupid.html.
3 http://www.investopedia.com/terms/s/sunkcost.asp.
