Sunk Costs And The $900 Plane Ticket

by Mike Holman

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JD from Get Rich Slowly recently talked about a decision he made to cancel a trip to England.  He had a $900 plane ticket which was non-refundable, non-transferable, non-everything.  The $900 was gone.

In his post, he makes the argument that the $900 he spent on the ticket was a sunk cost since he couldn’t get it back. 

With respect to Jd’s argument, I don’t think the $900 was really a sunk cost.  Yes, the money was gone and he couldn’t get it back, but he could still use the service that the $900 paid for. By deciding not to go, he was giving up a plane flight worth $900. 

Whether you give up $900 cash or give up an item worth $900, in my mind it’s the same thing.  Since he could have still taken the $900 flight at the time he made his decision, it wasn’t a sunk cost.

I think of a “sunk cost” in the context of money that was spent on something and now you have a decision about a course of action which will ensure that you can’t get the original money back.

For example, let’s say you have a business that you have invested $50,000 in and it loses $1,000 per month.  You’ve given it lots of time and work very hard, but it’s clear that you have to close the business. 

It would be very tempting to say “but I put $50k into it, I can’t close it down since I’ll never get that back”.  However, you have to turn it around and ask yourself – would I buy this business for $1 which requires 50 hour weeks and loses $1,000 per month?  If the answer is no, then the business should be shut down.  Note that the original $50,000 was not part of that analysis because it is a sunk cost and is irrelevant to the decision.

Similarily, maybe someone buys a stock at $100 and it drops to $50.  Some people won’t be able to sell that stock at $50 or anything less than $100, because that decision will ensure they won’t get their original money back. Again, the proper analysis is to decide if that stock would be worth buying at $50 – if yes, then keep it, otherwise sell it. The difference in value between the current stock price and the original stock price is a sunk cost and is irrelevant.

In JD’s case, he paid $900 for a plane ride.  When he decided to give up the trip, he can argue that the $900 was gone and is a sunk cost, but I would argue that he still had the option of getting on the plane (a $900 value) and therefore it is not a sunk cost.  Or at least not a very good example of it.

What do you think?  Was JD on the money when he used the “sunk cost” argument?  Is my argument “sunk”?

 

 

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{ 7 comments… read them below or add one }

1 Anthony Mills

Well, yes, the $900 is a sunk cost. It’s spent, and it can’t come back.

However, at that point, the question becomes, do I take advantage of a free trip to Europe or not? Apparently, he felt that a free trip to Europe was not a useful option to exercise.

2 jesse

I agree with Anthony it is sunk. He bought an option to go to Europe and decided not to exercise it for various reasons.

3 Sampson

I agree that it is technically a sunk cost, the money having left his pocket already, however, you can’t view it as a free trip to Europe.

What he did was pay for something, then derive no value from it – basically throwing money away – in a company this would be analogous to buying some equipment and never using it – a waste of money.

My sense is that people never like to lose or waste money, and often find ways to justify if it has been done. The decision to not go was a $900 one – like Mike points out, if it’s too much to waste, then just go on the trip, if not, no need to validate by using these terms.

4 Bruce

The sunk portion would be the difference between what he paid and what he could sell it for, right up until he can no longer sell it. After that time it is all sunk.

Just my opinion.

5 cashflowmantra

It seems like a matter of semantics to me. Call it whatever you want; the money is gone.

6 Gary

I remember a lengthy discussion about “sunk costs” in a university business/accounting course many ages ago. The airline ticket meets the test of a sunk cost. It has been spent and cannot be reversed (non-refundable, etc). Say I bought a similar ticket 6 months ago when planning a trip and today find that I don’t have enough money for the rest of the trip (hotel, meals, etc) because I lost my job 2 months ago. Whether I go or not depends on whether I have enough resources to pay for the other expenses. The $900 cost of the ticket is irrelevant to the decision at that point – a sunk cost. That’s the risk of buying such a ticket.

7 James McIntosh

I agree with the posters here who say it IS a sunk cost. Once the money is spent, the decision whether to take the flight or not should not take into consideration the $900 expense. You incorrectly state in your essay that getting on the plane has a $900 value, but here’s where you’re wrong. If he actually decides NOT to get on the plane, then the value TO HIM of getting on the plane, in terms of the utility he’d derive from it, is actually a NEGATIVE number, not $900. Why would he choose to experience dis-utility?

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