What exactly is “Sunk Cost”?


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

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.

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 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..

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.

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.