Sunk cost

From Market
Jump to: navigation, search

Definition

A sunk cost is a cost of a transaction or activity that has already been incurred and cannot be reversed.

Note that although a sunk cost cannot be reversed, it may be possible to retrieve value from what was achieved through that cost. For instance, the purchase of an item that is not returnable is a sunk cost, but the item itself may be useful for other purposes or it may be possible to resell.

In production, sunk cost typically refers to fixed costs that need to be incurred at the outset, though even the variable costs eventually do sink.

In behavioral economics, the sunk cost fallacy refers to people's tendency to let sunk costs irrationally influence their decisions, largely in order to avoid admitting to themselves that the sunk cost may have been wasteful.