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Basic Economics: Sunk Cost | SterlingTerrell.net

Basic Economics: Sunk Cost


By: Sterling Terrell

What is a sunk cost?

A sunk cost is going to a concert - alone.

Let me explain.

Sunk cost are one of the things that economist worry about - but few others think about in a practical way (Or, any way at all, for that matter.).

Formally, a sunk cost is a cost that has already been spent, and therefore cannot be gotten back.

For example, if you start some new division of a company, the question of "Do we keep this division open or not?" should not be influenced by how much time was spent on creating, planning, and developing the new division. It should be determined by the new division remaining profitable.

Time that was spent on the new division is not relevant.

For in this case, time was a sunk cost (or, at least one of them) - it is gone no matter if we close the new division or leave it open.

Another good example might be that if you are in a dating relationship, the relevant answer to the question, "Should I continue to date this person?" should be answered by asking yourself:

"Would I still consider marrying this person?"

For that is in fact the only relevant consideration!

How long you have dated is a sunk cost.

How much you spent on the last present you gave them is a sunk cost.

For most people, ideas like ignoring sunk costs are difficult.

People take sunk costs into account everyday when they shouldn't.

Of course, those that study economics know better.

I told you all that to tell you this:

When I was about 23, I went to a Cory Morrow concert by myself.

I was dating a girl and had bought us VIP tickets a few weeks before the venue date.

We broke up about a week later.

I wasn't even that mad about the break-up or anything, but as the concert date approached, I got more and more agitated over the whole thing.

When the weekend finally came I was indignant.

I should have realized that, no matter what I did, the $75 (or whatever it was), I had spent on the tickets was a sunk cost. It was gone no matter what I did.

I should have said: 

"The cost of the tickets is gone no matter my decision. So, if I could do anything this Saturday night, what would I do?"

But what did I really do?

I said:  "I spent $75, and dang-it. I am going to that concert. I am not wasting both of these tickets."

Even economists can forget economics.

So, be aware of sunk costs.

And don't go to concerts alone out of spite.