In Investing and in Life; Ignore Sunk Costs
“Sunk costs: Cost already incurred which cannot be recovered regardless of future events.” Investor words
Our new home is practically unpacked and set up. But that pesky makeshift coffee table in front of the couch has been the cause of controversy. In the vein of “use what you have” theory, I stuck a small wooden table in front of the couch. But, since
the table was small, and I had a large piece of glass from another unused coffee table, I stuck it on top. Brilliant! Make a small coffee table large.
Here’s the problem; the table was too large for the space and everyone was banging into the edges and leaving with big bruises.
Solution
I went to glass shop and had a smaller piece of glass cut. Problem solved.
When El Carino came home, he immediately ran into the “new” table. In his frustration, he took it off and stuck it into another room while declaring, “No glass on the coffee table!” (And he was not kidding)
So, after paying $67.00 for the glass, it is deemed useless.
Options
- Go back to glass store and see if they will give me something for it.
- Use it somewhere else.
- Stick it in the garage and forget about it.
Seth Godin’s Take on Sunk Costs
“When making a choice between two options, only consider what’s going to happen in the future, not which investments you’ve made in the past. The past investments are over, lost, gone forever. They are irrelevant to the future.” Seth Godin
In Godin’s article he went on to state how money previously spent should not be a factor in future decisionmaking.
When selling a stock, many investors want to “get even” and won’t sell until the price rebounds to their initial purchase price. Sunk costs are in play here as well. What you paid for the stock is irrelevant. The decision to sell is based on the stock’s profit potential for the future.
The money is spent, the glass is unuseable, and I need to move on. It is a SUNK COST. In this case, money I might recoup going back to the shop to resell the glass is not worth the time and gas spent.
What sunk costs have you incurred? Is it easy or difficult for you to move on or do you dwell on the loss?
image credit: images_of_money
