Definition
Future decision-making should not be affected by the already incurred and irreversible expenditures.
In detail
Sunk cost refers to expenditures that have already occurred and cannot be recovered, such as R&D expenses, equipment purchases, or marketing costs. In management decisions, it should not influence future choices because these costs cannot be changed regardless of future decisions. It is often confused with 'opportunity cost' or 'incremental cost': opportunity cost is the maximum benefit foregone by choosing an alternative, incremental cost is the additional cost from a new decision, while sunk cost is past and irreversible. In the system, it is used to prevent the 'sunk cost fallacy'—continuing to invest because of past investments, leading to greater losses. Typically, the output is a decision principle or checklist reminding teams to ignore sunk costs and focus on future benefits during project reviews.
Example in practice
A manufacturing company's product line had received significant investment for development, but market feedback was poor and sales continued to decline. In a meeting about whether to discontinue or transform, some members advocated continued investment to 'recover costs.' At this point, the sunk cost concept was applied, clarifying that invested funds are non-recoverable and decisions should be based on future market potential and transformation costs. Through analysis, the team decided to stop additional investment and pivot to new product development, avoiding greater losses.