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”.
In: 59
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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