Definition: A cost that has already been incurred and cannot be changed by any decision made now or in the future.
Decision Rule
Always ignore sunk costs. They are never differential.
| Question | If Sunk Cost | If Not Sunk |
|---|---|---|
| Can this cost be recovered? | No | Possibly |
| Does this cost change based on my decision? | No | Yes |
| Should it affect my choice? | No | Yes |
Examples
| Sunk Cost | Why It’s Sunk |
|---|---|
| R&D already spent on failed product | Can’t recover regardless of next decision |
| Training costs for employee who quit | Money gone whether you hire replacement or not |
| Equipment purchase price | Already paid; only future costs matter now |
The Sunk Cost Fallacy
Psychological trap: Continuing a course of action because of past investment, even when future costs exceed future benefits.
“We’ve already put $2M into this project—we can’t stop now.”
The fix: Evaluate only from this point forward.
| Wrong Question | Right Question |
|---|---|
| ”How much have we invested?" | "What are future costs vs. future benefits?" |
| "Can we justify past spending?" | "Is continuing the best use of resources going forward?” |
Why It’s Hard
- Loss aversion: Abandoning feels like admitting failure
- Escalation of commitment: Doubling down to vindicate past decisions
- Accounting visibility: Sunk costs show up in records, creating pressure to “recover” them
Common Trap
Book value of equipment is a sunk cost. Market value (what you could sell it for) is an opportunity cost. Don’t confuse them.
North: Where this comes from
- Costs for Decision Making (parent framework)
- Time Irreversibility (past cannot be changed)
East: What opposes this?
- Differential Cost (costs that do change with decision)
- Avoidable Cost (costs that can be eliminated)
South: Where this leads
- Sunk Cost Fallacy (psychological failure to ignore them)
- Abandonment Decisions (when to cut losses)
- Project Evaluation (focus on incremental returns)
West: What’s similar?
- Spilled Milk (colloquial: “don’t cry over it”)
- Bygones Principle (economics: only future matters)
- Irreversible Decisions (game theory—commitments that can’t be undone)