How would you define sunk costs?

Sunk costs are defined as costs that have already been incurred and cannot be recovered. This concept is crucial in decision-making processes, particularly in evaluating whether to continue or discontinue a project. Since these costs cannot be changed, they should not influence current or future business decisions. Instead, decision-makers should focus on relevant costs that will be affected by their choices moving forward. Understanding sunk costs helps avoid the common fallacy of "throwing good money after bad," whereby individuals might continue investing in a losing venture simply because they have already spent significant amounts of money on it. This clarity ensures that businesses allocate resources effectively and justify their choices based on future potential rather than past expenditures.