Sunk Cost

A sunk cost is a cost that has already been incurred and cannot be recovered no matter what choice is made next. Rational forward-looking decisions ignore sunk costs entirely — only the avoidable costs going forward are relevant, because only those can be changed by the decision. Conflating sunk cost with current decision-relevant cost is the sunk-cost fallacy.

When to use

The sunk-cost test arises whenever the past commitment of money or effort is being used (incorrectly) to justify continuing a course of action. The lecture's example: a non-refundable deposit on Building A is not a reason to stay in Building A — the deposit is gone either way, so compare only the remaining costs (and benefits) of A vs B. Contrast with Opportunity Cost, which is the symmetric error: under-counting costs that don't involve a cash outflow.