Glossary · UK
What is Sunk Cost?
Money already spent that cannot be recovered, and which should not, in theory, influence a rational decision about what to do next.
Full Definition
A sunk cost is money, time or effort that has already been spent and cannot be recovered regardless of what decision is made next, such as a non-refundable deposit already paid, fees already incurred on an investment, or the cost of a course already taken. Standard financial decision-making principles hold that a rational choice about what to do going forward should be based only on the future costs and benefits of each option available now, ignoring sunk costs entirely, because they are the same under every option being considered and therefore cannot change which choice is actually best. In practice, people frequently fall into the "sunk cost fallacy" -- continuing to put more money, time or effort into something specifically because of what has already been invested in it (for example, staying in a poorly performing investment fund to "wait for it to recover" the losses already made, rather than assessing it afresh against other options available today), even when a clear-eyed comparison of the remaining choices would favour cutting losses and switching. Recognising sunk costs is a common piece of financial planning advice precisely because the emotional pull to "not waste" money already spent is strong, and financial advisers often encourage clients facing a decision -- whether to sell an underperforming investment, exit a costly subscription, or continue a home renovation running over budget -- to explicitly set aside what has already been spent and ask only what the best decision is from today onwards.