My wife and I are having a disagreement as to what it means. She says that it means the cost of something you purchased some time ago, and had you not purchased it the money would be gone anyway.
Basically, 3 years ago we decided to purchase something to hold onto and sell later on when the value goes up. She says that the purchase price can be considered as profit since it was so long ago. I disagreed. Anyway, she calls it “sunk cost”.
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It’s a cost that can’t be recovered, something like rent and research and development.
I see what she means as the money has already been spent to purchase the product although you are able to sell it and get that money back
A sunk cost is money that you’ve spent **and cannot get back.** The time frame has nothing to do with it. If you can resell the investment you bought, the cost is not sunk.
A sunk cost is the cost incurred to enter into an economic activity, that cannot be recovered, even if you decide to back out.
So for example if you set up a business and purchase a bunch of equipment. You could potentially resell that equipment and recover some costs. So that’s not sunk.
But if you had to pay for some licenses in order to legally trade in an industry, and those licences couldn’t be resold, then that cost of license could be described as sunk.
I would say that she has somewhat misunderstood the meaning, or at least stretched its meaning to suit her point..
A sunk cost is just money that you’ve already spent that you can’t get back. How long ago it was is irrelevant. Your wife is wrong. Anything that has resale value is NOT a sunk cost. An example of a sunk cost would be a nonrefundable deposit on something. Once you pay the deposit, you can’t get that money back.
Sunk cost is just a cost that cannot be recovered so it shouldn’t be used in decision making. Eg you paid to see a movie and you have watched half of it but you aren’t enjoying it. You also can’t get a refund. The sunk cost is the amount you paid and the time already spent. So in deciding if you want to leave the theater or watch the rest of the movie you shouldn’t be using the fact that you paid or the time spent as a reason to stay since those costs are not recoverable.
“Sunk cost fallacy” is a common term, and probably where one of you heard the term for it to enter the conversation.
It refers to the thought process of “I already spent some money on this. It would be a shame if I stopped spending money on it now.” In other words, throwing “good money after bad money.”
You could imagine the fallacy as “I bought a boat for $100, but then it sunk in the river. Because I don’t want my $100 to be wasted, I’m going to rent a truck for $50 to pull it out. If that truck sinks into the mud, then I’ll buy a different truck for $75 so that my $150 isn’t wasted.” The pattern then repeats.
In your specific conversation, the fact that you bought the investment means it is indeed a “sunk cost”; the fact that you aren’t getting the same money back means it is sunk. If you spend more money on the investment just because you have the investment and are hoping it pays off, you are probably doing a “sunk cost fallacy”. As a term it is entirely different from profit.
Most times, things that “can be considered for profit” use buzzwords and emotions to make people feel better about spending money, and thus spend more money.
Sunk cost is money you spend that you cannot get back.
So you want to make a lemonade stand. Wherever you live requires a permit to sell lemonade, so you buy a permit for $20. You now have a permit which you cannot sell, whether or not you make lemonade you have $20 in sunk cost into the permit.
You can sell any lemons, sugar, water or any combination thereof. The lumber you use to build the stand can be sold. This permit is non-transferable. Though you have a permit, the money you spent to get it is “sunk”.
you buy a cheeseburger and drive home to eat it. you take a bite. it’s disgusting. but you feel the need to eat all of it anyway or you’re losing money. but, you’re not losing money, the money is gone. that’s a sunk cost. sunk cost fallacy is thinking you lose less money by eating the rest of the bad cheeseburger.
If you own a Playstation and one of you accidentally buys an xbox game. That’s the sunk cost as it’s of no use to you and even if you were to resell the game, you’re selling it at a loss (because it’s now preowned).
The fallacy that usually goes with it is now that you had an xbox game and you don’t want that money to go to waste because that’s wasteful; you then buy an xbox to play that game rather than cutting your losses. You’re losing more money to cover the loss.
Your wife is wrong.
Sunk cost is cost that you have already paid but cannot recover. Sunk cost most often comes in context of the “sunk cost fallacy”.
This is a real life example of a sunk cost that did happen some years ago. There are two roads between Pune and Mumbai, the old highway and the new expressway. The expressway has a toll and the old highway is* free to use. Both are well maintained roads, the expressway is just faster which is why most people choose it even though there is a toll. There are periodic exits from the expressway that take you to the old highway. So one fine day, we pay the toll at the entry and entered the expressway. A little further ahead we notice that there is a massive traffic jam on the expressway due to an accident or road construction or something. Meanwhile the old highway does not have any traffic. There is an exit towards the old highway coming up in half a kilometre. You have already paid the toll for the use of the entire expressway. If you stay on the expressway, you might reach home in 3-4 hours because of the traffic (Normally takes 1.5 hours if there’s no traffic). If you take the exit and travel on the old highway, you’ll reach home in 2 hours. Do you take the exit or not? Regardless of how much you spent on the toll, you should take the exit and travel along the old highway. The money on the toll is already spent. The same money will be spent regardless of which route you take.
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