What is a sunk cost?

A sunk cost refers to a cost that has already been incurred and cannot be recovered. It is independent of current or future decisions, meaning that when evaluating options or strategies moving forward, the sunk cost should not be factored into the decision-making process. The rationale behind this is that since the cost is already spent, it should not influence any new choices, which should be based solely on future costs and benefits.

In contrast, options describing costs that can be recovered, vary with decisions, or affect future planning do not align with the definition of a sunk cost. This distinction is crucial in decision-making processes, such as in business or project management, where understanding sunk costs is essential to avoid falling into the trap of "throwing good money after bad."