Nobody likes to admit that the monkey they spent on something is gone and there is no getting it back, but recognising a sunk cost whether it's a concert ticket or a car is the best way to stop losing more money.
Photo by gabetarian.
What are sunk costs? In brief a sunk cost is money you've already spent that cannot be returned to you. Gambling is a classic example of sunk costs when someone adopts the mindset that they need to gamble more to cover their costs. Losing $100 and then chasing the debt at the Craps table trying to cover your initial loss is a sure way to leave the Casino with even lighter pockets. At the financial blog The Simple Dollar they highlight common places that sunk costs show up in day-to-day living and how you can identify and acknowledge sunk costs to cut down on stress and further financial loss. They open with the example of baseball game tickets:
In order to get cheaper tickets, we bought the tickets in advance – they're already paid for and printed out. We're all ready to go to the game.
But let's say it gets to be 6 PM this evening and our son is sick, or my dad gets tired and doesn't feel like going.
It might make sense for me to want to push everyone to go to the ball game. After all, I already have the money invested in the tickets – we wouldn't want that to go to waste.
In reality, though, it doesn't actually make any sense to choose the less enjoyable option this evening if things turn out that way.
Think about it this way. I've already paid for the tickets – there's no refund, no matter what we choose to do. So, in essence, all those tickets are really saying is "you have the ability to now go to the Rangers game for free this evening."
The cost of those tickets is already sunk. It doesn't matter what we do this evening – we're not going to get the cost of those tickets back.
Believing that you must go to the game in order to somehow recover some value is the sunk cost fallacy – and it can be dangerous.
So what can you do in the face of a sunk cost? Make the best decision you can in the present moment. If you're looking at a potential repair on a car that you've already spent thousands trying to get back into shape you have the option of sinking more money into it with the attitude of "I've got too much money into this thing to give up on repairing it" or you can acknowledge that the car, despite the money you've already put into it, isn't worth it.
Check out the full article for some great tips on avoiding sunk costs before they occur and minimising their impact when you run into them. Have your own tip, trick or story about sunk costs to share? Let's hear about it in the comments.
Some Thoughts on the Sunk Cost Fallacy [The Simple Dollar]