Glossary - Sunk Cost
Sunk cost refers to money that has already been spent and cannot be recovered. It's a concept in economics and business decision-making that suggests past investments should not influence ongoing or future decisions, as these costs cannot be recuperated. The rationale is that only future costs and benefits should be considered in making economic or business choices.
Also known as
- Retrospective Cost
- Past Cost
Use cases examples
- Business Plan: The initial investment in research and development, amounting to $500,000, is considered a sunk cost and will not be factored into the decision to proceed with product launch.
- Financial Statements: Company A recorded a $1,000,000 acquisition of Company B as a sunk cost, acknowledging that this amount spent in the purchase cannot influence future spending or operational decisions.
Considerations for investors
- Investors should evaluate new funding rounds or additional capital infusions based on the project's current and future merit, disregarding money already invested as sunk costs.
- Assessing start-up performance and potential should be devoid of emotional attachment to sunk costs to ensure unbiased investment decisions.
Considerations for founders
- Founders should distinguish between sunk costs and potential future investments to avoid the sunk cost fallacy, which can lead to over-investment in a failing project.
- Understanding that sunk costs are irrecoverable can help founders make more rational decisions about when to pivot away from unsuccessful ventures or strategies.
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