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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Ok so there are really two answers here: what is ‘sunk cost’ and what is ‘sunk cost fallacy’
Sunk cost is an investment that you can’t get back. Like you spend x Hours cleaning the kitchen, you rent a movie online, or you spend 3 years in a relationship. Those costs (hours/$/years) are paid and irrecoverable.
A lot of the time when people talk about sunk costs they are actually referring to an idea called ‘the sunk costs fallacy’. This is the idea that you should make the choices that will result in the best outcome based on the current and only the current situation. Like in craps the odds of red hitting is the same, regardless of how many times red has come up in the past. If you want to watch a movie you should watch the movie that will bring you the most joy, because that’s the purpose of watching a movie, right? Even though you might have already paid for a movie rental, if your goal is to maximize joy and a free movie will bring you more joy, you should spend your limited free time to watch the free movie. This is because the rental is already done and paid for (sunk cost) and so that cost shouldn’t have any bearing on your future decisions for investment of time (spent watching a movie)
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