relevant vs sunk costs

You paid 40 for concert tickets weeks ago. Tonight there is a blizzard, you feel sick, and going would be miserable. A little voice says 'but I paid 40, I can't waste it!' That 40 is already gone whether you go or stay — nothing you do tonight brings it back. The only thing that should decide your evening is what changes from here: the misery of going versus the comfort of staying. The 40 is a sunk cost; the future misery or comfort is the relevant cost.

Precisely, a relevant cost is a future cost that differs between the alternatives you are choosing among — it is the only kind of cost a decision should be based on. A sunk cost is a cost already incurred that cannot be changed by any future decision; it is therefore irrelevant to that decision and should be ignored. For example, a company spent 80,000 developing a product that now needs another 30,000 to finish, and finishing would bring in 100,000. The 80,000 is sunk — ignore it. The real comparison is 30,000 more to gain 100,000, which is clearly worth doing. Costs that are the same under every option also drop out as irrelevant, because they do not tilt the choice.

This matters because humans are wired to honor sunk costs — the famous 'sunk cost fallacy' of throwing good money after bad, staying in a bad project or job because of what we already put in. Managerial accounting deliberately strips the analysis down to only what differs going forward. A subtle point: a cost being large or painful does not make it relevant; only being different and future does. Equally, ignoring a sunk cost is not saying the past spending was foolish — it is saying the past cannot be unspent, so it has no vote in tonight's decision.