Sunk Cost

Sunk cost is a term that refers to a cost that has already been incurred and cannot be recovered.

Sunk cost is a concept that is used in economics that pertains to money that has already been spent and cannot be recovered. This type of cost is typically used when deciding whether to continue investment in something. In other words, sunk costs cannot be recouped and should not be considered when making decisions such as whether to invest more or cut losses.

For example, a startup founder who is considering investing more into their startup would do well to forget sunk costs. This is because no matter how much money has already been invested, it isn't something that can be recovered and should not factor into the decision about whether to invest more.

Alternatively, variable costs are expenses that change as an organization's production or usage varies. Variable costs, as opposed to sunk costs, should be taken into account while making decisions as they can change depending on the organization's needs.

Sunk cost is often confused with opportunity cost. Opportunity cost is the potential benefit that is foregone when one alternative is chosen over another. The opportunity cost is the monetary value of the best alternative outcome not chosen.

For example, a startup founder is considering investing more money to add more features to their app. The founder might be tempted to take their sunk costs into consideration when making the decision, such as the amount of money already invested and the time spent working on the app. However, this would be a mistake. The sunk costs should be forgotten and the founder should make the decision based only on the available resources and potential outcomes.    

This example illustrates how easy it can be to confuse sunk costs with opportunity cost, and how important it is to differentiate between the two. While it is important to consider how much has already been invested and what has been lost, it's important not to factor this into the decision-making process. Greed or emotion should not play a role in the decision making process, as it will only lead to a skewed result.