Sunday, September 18, 2011

Sunk costs and decision making

In a recent conversation about having spent money on a swim pass that I hadn't really used, the concept of sunk cost was raised.  Basically a sunk cost (whether money or time) is one that has already been incurred and cannot be reversed.  That tends to fit many purchases unless there is some resale value that is actually achieved.  To simplify decision making about what to do with items that have been purchased but are no longer used, this concept can be helpful.  It also can help with letting go of guilt feelings over not using something that cost money and/or time.  

At the other end of decision making, how can the concept of sunk cost help with decisions about how to spend our money and time?  A simple example is to think about the cost per wear of an item of clothing or the delight per wear if it is something that won't be worn often.   

A recent personal example is my need to acquire an extra large dog crate for when my son's dog visits over Thanksgiving.  Since I really did not want much sunk cost of either money or time for a potential once a year visit, I first tried to borrow one by sending out emails to friends to see if anyone had one to lend.  While it was surprising how many friends had dog crates stored in garages and basements, they all were too small or of the airline type which we didn't think the dog would like much.  I then looked on Craigslist and found one exactly like my son desired and it was only about a mile away.  I purchased it for about $100 less than a new one would cost and spent very little time on the transaction.  I won't know my actual sunk cost until I try to resell it in the future, but for now I have minimized my potential sunk cost be making conscious decisions about this purchase. 


  1. Hi Juhli!
    I hear you about sunk costs. We actually purchased a pool membership this year for $350.00 because we were able to walk to the pool. We used it maybe 4 times. Not a great bang for the buck. Oh well.

    Thanks for the advice on my last post, and for commenting!

  2. I think spending on exercise probably is an example most people can relate to!


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