What is Sunk Cost?
Sunk cost refers to the past expenses that have already been paid and cannot be retrieved. These costs are irrelevant for future decision-making as they’re beyond our control and irreversible. The concept of sunk costs is of great importance in business, personal finances, and project management. Understanding sunk costs is important for making rational decisions. It is always advisable to avoid focusing on the sunk cost that may adversely affect future choices. According to Milton Friedman, it is crucial to understand that sunk costs should not impact any decision-making process. This highlights the idea that previous expenditures should not dictate decisions.
Geeky Takeaways
- Sunk expenses refer to past costs that have been already paid and are unrecoverable.
- The key characteristic of sunk costs is that they are irrelevant to future decision-making.
- Instances of expenses encompass gym subscriptions, unsuccessful entrepreneurial endeavors, and obsolete technology investments.
- It is suggested to avoid the sunk cost fallacy, which is the mistake of letting past spending influence future choices.
Table of Content
- Examples of Sunk Costs
- Types of Sunk Costs
- Sunk Cost Fallacy
- How to Avoid Sunk Cost Fallacy?
- Conclusion
- Sunk Cost – FAQs