Why are sunk costs considered irrelevant in decision-making?

Sunk costs are expenses that have already been incurred and cannot be recovered. Because they are irrevocable, they should not influence current and future decision-making processes. When evaluating options, decision-makers should focus on costs and revenues that can still be affected by the decision at hand.

Since sunk costs cannot be changed or recovered, they are irrelevant to the analysis of future actions. For example, if a company has spent a significant amount on developing a product that is not expected to succeed, the money already spent should not affect whether to continue investing in that product or to pivot to a new idea. Decisions should be based solely on future costs and benefits, which are pertinent to moving forward.

The other choices highlight factors that either misinterpret the role of sunk costs or confuse them with relevant information that should be included in a decision-making process. Focusing on future insights, potential profit, or upcoming costs does not accurately address the nature of sunk costs, which are fixed and determined in the past. This underscores the importance of recognizing the distinction between past investments and future implications when making business decisions.