Sunk costs are expenses that cannot be recovered or reversed, such as the cost of buying tickets to a sporting event or a new car. They are not a factor in budgeting or decision-making, as they only exist after a purchase has been made. Financial planners focus on potential costs instead.
Also known as stranded costs, sunk costs are any expenses or costs that have been incurred in the past and cannot be recovered or reversed. Although sometimes confused with the concept of economic loss, sunk cost is more concerned with what was paid for an asset and not with any losses resulting from the difference between the original purchase price and the price for which the asset is sold at a later date. Sunk cost doesn’t technically exist until a purchase is made, so it is important to assess the potential of the purchase to deliver the satisfaction the consumer requires.
One of the easiest ways to understand the sunk cost is to consider buying tickets to a sporting event. Each ticket has a specific price that must be paid to participate in the event. The prospective buyer looks at the potential cost in the form of the ticket price, then decides whether or not to actually buy. If you go ahead with the purchase, the amount of money you paid for those tickets is a sunk cost.
In the event of circumstances where the ticket purchaser is unable to attend the event, the purchase of such tickets cannot be reversed; the sunk cost is not a historical fact and cannot be changed. While it may be possible to sell tickets for a certain type of discounted fare, it is likely that you will not be able to recoup the full price of the original purchase. In any event, the resale of tickets is treated as a separate transaction from the sunk cost, as the original purchase has not been reversed or reversed.
The same general approach applies to buying a new car. Any amount paid to secure ownership of the vehicle represents the sunk cost of the transaction. Even if the owner subsequently sells the now-used vehicle for less and recovers part of the initial purchase amount, such a transaction does not change, replace, or cancel the original purchase.
In terms of budget and general economics, sunk cost is not really a factor that buyers consider. As a transaction is being considered, the cost of the purchase is identified as a potential cost. This potential cost becomes a sunk or stranded cost once the purchase has been completed and all opportunities to reverse the purchase have passed. For this reason, financial planners tend to place more emphasis on potential cost when it comes to making decisions involving money management, and see stranded costs as simply one possible outcome of that decision-making process.
Protect your devices with Threat Protection by NordVPN
