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
It’s usually referred to in relation to the “sunk cost fallacy” also known as throwing good money after bad. And in that case it’s about spending more money on something, because you’ve already spent a significant amount. Like continuing to repair an old beater car rather than cut your losses and trade in or scrap it.
Okay, we know “sunk cost” is not the right name for what she’s talking about, but what is she talking about?
I know almost nothing about accounting, but I would like to learn, so I hope y’all will bear with me and.possibly help me figure this out.
After the application of a bit of Google Fu, I think she’s saying the entire net sale price of the investment in question will add to your liquid net worth for this year regardless of what it does to your total net worth because the original price has little to no bearing on your liquid net worth for this year.
Do I understand what she’s saying?
Is she correct?
Is there a word for what happened to the original purchase price in terms of current liquidity?
Edit: removed some words for clarity’s sake..
In her scenario the purchase price would be a loss due to inflation. Just to break even you’d need to sell at about 115% of original cost.
She’s also wrong about sunk cost. As others have mentioned a sunk cost is an expense you cannot get back.
Sunk cost comes from shipping and intercontinental trade.
Back when companies would fund trans Atlantic trade ventures, they would gather together investment from many people who would buy *stock* in the venture. Stock literally meant stocking up on things like food, water, supplies for the crew, trading gold, rum, rations, etc. they shop would sail and return with trade goods and the value of what they return with would be distributed according to how much stock you bought (hence, the “stock market” and shares in a “venture”). The excess value being the profit.
When the ship sank, the accounting tables showed those stock costs as sunk. People would ask “where’s my share of the money back?” And the answer would be “sunk cost”.
In you and your wife’s house, nothing sank right? So there’s no “sunk cost”.
I want to learn to play electric guitar so I buy an expensive guitar and an amplifier.
But I don’t practice enough to get good.
So I pay for lessons.
But I still don’t practice enough, so I don’t improve much.
Then I think “If I buy an even better guitar, I’ll sound better and want to practice more.”
But I don’t.
Then I say “maybe I should play drums” so I buy those.
But I don’t practice.
So I pay for lessons.
And I don’t practice.
It’s a cycle of chasing something by throwing money at it when I can’t accept that it’s time to give up.
Sunk cost is the money, time, or effort already invested in something. But it’s “sunk” because you can’t easily undo that investment, or get that investment back, especially if it’s time or effort. There’s no refund.
Usually it’s used in the context of the “sunk cost fallacy”.
The Sunk Cost Fallacy, is when someone refuses to abandon a failed idea, because they’ve already invested so much in it. So they just keep investing more, thus digging the hole deeper. It’s a major reason why people refuse to abandon investments that are losing money, or stay in jobs they hate, or relationships that are toxic.
Your wife is wrong. A sunk cost is a cost that you already had, so it shouldn’t be weighed into current and future decision making.
For example: ”I don’t really enjoy golfing anymore, but I’ve spent thousands of dollars on clubs, equipment and club memberships so I have to keep playing golf.”
No, the money spent on golf are sunk costs – you wont get that money back by continuing to play golf. If you don’t enjoy playing golf you should quit, and the only economic factors you should consider are future ones. Such as the money you would save by ending your club membership, of the money you could get by selling your clubs and equipment.
Sunk cost is when you stick with an investment that’s no good. It’s related to the phrase “throwing good money after bad”
Suppose you decide to buy an old car so you can fix it up to sell it for a profit. You spend **x** to buy it and **y** to start fixing it. But you find it’s going to cost even more to really fix it.
If you don’t finish fixing it, you’ll lose **x** and **y**. That’s bad.
But suppose you will lose even more than that if you spend more to fix it. You should be rational and just walk away. You wouldn’t spend that much on fixing a junker, but the fact that you’ve already spent all that money makes most people a little irrational. That’s sunk costs.
> She says that the purchase price can be considered as profit
This is not correct at all.
The purchase price is a loss, not a gain.
If it was a profit you would have it and the thing you bought.
If you sold it, the only profit would be the money you have after you take away the initial cost.
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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