Definition:
A sunk cost is a cost that has already been incurred and cannot be recovered. Since it cannot be changed regardless of future decisions, it should not be considered when evaluating whether to continue, modify, or abandon a project, investment, or business activity.
What is the Sunk Cost Fallacy?
Sunk cost fallacy is one of the most common mistakes in finance and business decision-making.
The sunk cost fallacy is a cognitive bias where people continue investing in a project, investment, or decision because they have already spent money, time, or effort on it, even when stopping would be the better choice. Like when a company spends ₹50 lakh developing a new product. Market research later shows there is little customer demand, but management continues investing because "we've already spent too much to stop."
The ₹50 lakh is a sunk cost. The decision should be based on whether future investment is likely to generate adequate returns, not on money that has already been spent.
Examples of Sunk Costs
Some common examples include:
Money spent on market research for a product that is later discontinued.
Fees paid for a professional course that you decide not to complete.
Non-refundable travel bookings.
Advertising expenses for a campaign that has already ended.
Development costs for a software project that no longer meets business needs.
Are Sunk Costs Tax-Deductible?
A sunk cost is an economic concept, not a tax classification.
Whether an expense is deductible depends on the applicable tax laws, the nature of the expenditure, and the circumstances in which it was incurred. Simply because a cost becomes "sunk" does not automatically determine its tax treatment.
Definition:
A sunk cost is a cost that has already been incurred and cannot be recovered. Since it cannot be changed regardless of future decisions, it should not be considered when evaluating whether to continue, modify, or abandon a project, investment, or business activity.
What is the Sunk Cost Fallacy?
Sunk cost fallacy is one of the most common mistakes in finance and business decision-making.
The sunk cost fallacy is a cognitive bias where people continue investing in a project, investment, or decision because they have already spent money, time, or effort on it, even when stopping would be the better choice. Like when a company spends ₹50 lakh developing a new product. Market research later shows there is little customer demand, but management continues investing because "we've already spent too much to stop."
The ₹50 lakh is a sunk cost. The decision should be based on whether future investment is likely to generate adequate returns, not on money that has already been spent.
Examples of Sunk Costs
Some common examples include:
Money spent on market research for a product that is later discontinued.
Fees paid for a professional course that you decide not to complete.
Non-refundable travel bookings.
Advertising expenses for a campaign that has already ended.
Development costs for a software project that no longer meets business needs.
Are Sunk Costs Tax-Deductible?
A sunk cost is an economic concept, not a tax classification.
Whether an expense is deductible depends on the applicable tax laws, the nature of the expenditure, and the circumstances in which it was incurred. Simply because a cost becomes "sunk" does not automatically determine its tax treatment.