For some reason the phrase “sunk cost” has always fascinated me. I don’t know why — maybe it sounds like “sunken treasure” or something, which it isn’t. I never even knew what the phrase meant until recently.
According to wikipedia, “In economics and business decision-making, sunk costs are costs that cannot be recovered once they have been incurred”.
I never really saw the relevancy of that though. I mean, most costs are sunk costs by that definition, except for items we can return for full value. So why the special phrasing?
I finally heard an explanation somewhere that made sense to me. It’s not so much that sunk costs are a variable, it’s that they shouldn’t be a variable. For example, me buying and wearing a pair of shoes shouldn’t influence whether or not I continue to wear the shoes if I find out later that they don’t fit. I should get rid of them instead of ending up with blisters on my feet.
Too often though, people do let sunk costs influence them. They figure that they paid for the shoes, so they might as well keep right on wearing them even though doing so is damaging to their feet. But there’s no way to get full price back for the shoes, so you may as well donate them or sell them on eBay for whatever you can get and move on instead of making the situation worse.
An easy way to tell if you are letting sunk costs influence you is to ask yourself if you would do the same thing again now. Would you buy the same shoes? Would you buy the same duplex? Would you keep trying to make a living in a place you hate?
If the answer is no, move on as quickly as feasible. Don’t let the (literal or figurative) price you’ve already paid convince you to keep hoping that a bad situation will somehow magically improve.