Personal Finance – Caffeinated

Jolting For More Jingle Jangle

On Sunk Costs April 6, 2010

Filed under: Uncategorized — coffeecents @ 3:09 pm

What’s done is done, what is past is past.  Whether we’re referring to a relationship with a person or a relationship with money, or heck, a relationship with God,   whatever has been etched in the past is non-alterable.

In econo-speak, we refer to this as a “sunk cost.”  A sunk cost, once paid, cannot ever be returned.  It is something bought from a store with a no return policy.   Yet, what is often seen is that we do not ignore sunk costs when we should.  It’s our psychology being the enemy of ourselves again.  We’ve paid, something (time, money, emotion) into whatever it is, and rather than cut ties and bail.

A great example here is say, a purchase of a stock that didn’t quite pan out.  Rather than buck up to the loss, its quite commonplace to see an investor hold onto a mal-performing stock in the hopes that one day they’ll break even

If it was a bad judgement call to buy, and then becomes a bad stock to hold, what possible logic exists to justify its continued presence in our portfolio.  I don’t see sunk costs talked enough in the personal finance world.  Perhaps because they’re uncomfortable to discuss.

The best action is to act like a poker player who has bought into a tournament.  Once his seat has been purchased, that cost is sunk.  It is gone. The only possible recovery is to win, place, or show.  Poker players tend to switch up strategies once play starts to find something that works with their table, their cards, their hands.  The sunk cost of the entry fee is ignored by the good poker players, they recognize that money is already forfeit.

Keeping a bad credit card, a bad stock, 401k, etc, because you want to break even, stops one from playing the good hands that come along, because one is too focused on getting back from those bad hands

Here’s a good link on this subject:  Sunk Costs

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One Response to “On Sunk Costs”

  1. Jason Says:

    Hey Stephen! I ran into this accidentally, but it makes sense that you have an econo blog. 🙂

    -Jason (JAY), DCFüd
    http://www.dcfud.com


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