Sunk costs are expenses that cannot be recovered or reversed, such as the purchase of tickets or a car. Financial planners focus on potential costs when making decisions involving money management.
Also known as stranded costs, sunk costs are any expenses or costs 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 rather than any losses resulting from the difference between the original purchase price and the price at which the asset is subsequently sold. . meeting. Technically, the sunk cost does not exist until a purchase is made, making it important to assess the purchase’s potential to deliver the satisfaction sought by the consumer.
One of the easiest ways to understand sunk cost is to consider buying tickets to a sporting event. Each ticket has a specific price that must be paid to attend the event. The prospective buyer considers the potential cost in the form of ticket prices and decides whether or not to actually purchase. If he or she proceeds with the purchase, the amount paid for these tickets represents a sunk cost.
If circumstances arise where the ticket purchaser is unable to attend the event, there is no way to reverse the purchase of those tickets; sunk cost is not a historical fact and cannot be changed. While it is possible to sell the tickets for some sort of discounted rate, it is likely that it will not be possible to recover the full price of the original purchase. In any case, the resale of the tickets is seen as a transaction distinct from the sunk cost, as long as the original purchase was not canceled or voided.
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 later sells the now-used vehicle for less and partially recovers the initial purchase price, this transaction does not change, replace or reverse the original purchase.
In terms of budget and overall savings, sunk cost isn’t really a factor that buyers consider. While a transaction is being considered, the purchase cost is identified as a potential cost. This potential cost only becomes a sunk or idle cost when the purchase is completed and any opportunity to reverse the purchase has 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 hidden cost as simply a possible outcome of that decision-making process.
Asset Smart.
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