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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