25 Nov, 2025
4 mins read
A sunk cost is a cost that has already been spent and cannot be recovered. It does not change based on future decisions, yet many people continue to factor it into choices, often leading to poor outcomes. Understanding sunk costs helps individuals and businesses make clearer and more rational decisions.
This guide explains what sunk costs are, how they work, the sunk cost fallacy, and how to avoid it.
A sunk cost is money that has already been spent and cannot be retrieved, regardless of future actions. Once the cost is incurred, it should not influence any new decisions. Instead, decisions should be based on expected future benefits and costs.
Sunk costs appear in both personal and business situations.
For example:
Money spent on a non-refundable ticket
Investment in a project that cannot be recovered
Money paid for a service that cannot be undone
These costs remain the same no matter what happens next.
Sunk costs are independent of future outcomes. They are past expenses that no longer affect the decision at hand. However, people often attach emotional value to these costs, making it harder to ignore them.
They cannot be reversed
They should not influence future choices
They often create emotional or psychological attachment
In business, sunk costs could include research costs, equipment that cannot be resold, or marketing expenses that did not produce results.
The rational approach is to consider only future costs and benefits when making a new decision.
The sunk cost fallacy occurs when people continue with an action or project because they have already invested time, money, or effort, even when it is no longer beneficial.
This fallacy often leads to poor decision-making. Instead of cutting losses, individuals continue investing in the hope that the situation will improve.
Finishing a meal you do not want because you paid for it
Continuing a failing project because a lot of money has been invested
Staying in a long line even if moving to another one is faster
The sunk cost fallacy is driven by emotional commitment, fear of waste, and reluctance to admit a mistake.
Avoiding the sunk cost fallacy requires conscious effort and logical thinking. Here are practical steps:
Base decisions on expected benefits, not past expenses.
Recognise that not every investment will produce positive returns.
Emotional attachment can cloud judgment. Pause and assess decisions objectively.
When goals are clear, it becomes easier to stop when they are no longer achievable.
Discussing a decision with someone not involved in the investment can provide clarity.
Regular evaluation helps identify when a situation has changed and when to stop.
Sunk cost and opportunity cost are different concepts but often confused.
Refers to money already spent
Cannot be recovered
Should not affect future decisions
Refers to benefits lost when choosing one option over another
Helps compare alternatives
Influences decision-making
For example, if you spend ₹500 on a course you decide not to attend, the ₹500 is a sunk cost. If you attend the course instead of using the time to work and earn money, the lost income is the opportunity cost.
Sunk costs appear in daily life and business situations.
Buying a gym membership and not using it
Spending money on a hobby you no longer enjoy
Paying for repairs on an old car that keeps breaking down
Research and development costs in a failed project
Marketing campaigns that did not produce results
Salaries paid during a project that gets cancelled
Money lost in a declining stock
Capital invested in equipment that cannot be resold
In each case, the cost has already been incurred and cannot be recovered.
Sunk costs are unavoidable, but they should not influence future choices. The key is to focus on future gains rather than past expenses. By understanding the sunk cost fallacy and learning to avoid it, individuals and businesses can make clearer, more rational decisions. Recognising when to stop investing in unproductive actions is an important skill that leads to better financial and personal outcomes.
It is called a sunk cost because the money is considered “sunk”, meaning it cannot be recovered.
They are irrelevant because they remain the same regardless of future decisions, so they should not affect the choice you make next.
A common example is a non-refundable ticket. Once purchased, the money cannot be recovered even if you decide not to use it.
Some sunk costs may be fixed, such as equipment purchases, but not all fixed costs are sunk. Fixed costs occur regularly, while sunk costs refer specifically to past, unrecoverable expenses.
Calculate your Net P&L after deducting all the charges like Tax, Brokerage, etc.
Find your required margin.
Calculate the average price you paid for a stock and determine your total cost.
Estimate your investment growth. Calculate potential returns on one-time investments.
Forecast your investment returns. Understand potential growth with regular contributions.
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