SUNK COST
- Treavor Dodsworth CFP®, CPA, CKA®
- May 2
- 1 min read
Sometimes the desire to justify past decisions leads to making poor future decisions.
For example:
Scenario 1: Let's say you have a car that is getting older, it is not worth very much and may need replaced soon. The mechanic tells you a major repair needs to be done. Do you make the repair or not?
Scenario 2: Let's say you have a car that is getting older, it is not worth very much and may need replaced soon. The mechanic tells you a major repair needs to be done. A week ago you just paid $500 to fix the AC. Do you make the repair or not?
The answer should be the exact same in both situations. The fact that in Scenario 2 you had just spent $500 on the car should have virtually no bearing on the decision- that is a sunk cost. A cost that has already been paid that is irrelevant to future decisions.
This doesn't mean you don't learn from past experiences. You may learn this car is breaking every time you turn it on. That should factor in to the decision but just because you already paid money doesn't mean you should follow it with more money.
Understandably, we don’t want to make poor decisions but in our pursuit of not making poor decisions we sometimes follow sunk costs with additional cost. Given that we are not all-knowing, we must make the best decisions we can with the information available to us without allowing prior non-refundable expenses to “guilt” us into doing one thing or another.