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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The reason why you don't look at sunk costs can be summed up in the saying "there's no use crying over spilled milk."  Sunk costs are money you've already spent and no matter what you do now, there's no getting that money back.


Let's say you have a computer and its DVD drive dies and you replace it for $200.  Then you find out your whole computer is screwed up and you need to spend $1000 to fix it.  Your other choice is to buy a new one for $1100.  Which should you do?

If you looked at sunk costs, you'd buy the new one.  Why?  Because you'd say "I already spent $200 and now I have to pay $1000 -- that means the whole things will cost me $1200.  Better to buy a new one for $1100."  (I'm assuming your old one would be just as good as the new one.)

But by not looking at sunk costs, you know you should fix the old one.  Why?  Because it actually costs less.

The $200 is money you've spent no matter what and buying the new computer won't make it come back.

So -- no use crying over spilled milk -- just forget what you already spent and move on.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

Not considering sunk costs in deciding future course of action is not same as not not looking at the past or learning from the past in deciding future course of action.

Sunk cost is a concept used to identify costs incurred in the past which have no impact on the outcome of decision being undertaken now. Sunk costs are defined as the cost that have already been incurred and which cannot be recovered whatever is the future course of action. Thus sunk cost is something which you may regret having incurred, but about which you can do nothing. And if you can do nothing about, it is best not to take this in consideration.

Let us say you purchased a vacuum cleaner in sale at very low price but with no warranty. Unfortunately it breaks down within a week and you spend a significant amount for its repair. But again after a fortnight the vacuum cleaner breaks down. Now you have to decide weather you continue with the cleaner which may need frequent repairs, or buy a new vacuum cleaner. The sunk cost concept advises that that your decision to buy a new vacuum cleaner should not take into account the amount you have already spent on purchasing the vacuum cleaner and having it repaired. This means you do not say that I have already spent X dollars on the old one and now for a new one I have to spend additional Y dollars, so is it worthwhile to spend X + Y dollars. The X dollars are sunk cost, so you don't consider it. You just consider the Y dollars that you need to spend now.

Please note that this concept does prevent you to learn from your past. You can use your past experience in either forecasting your repair expenses if you continue with the old cleaner, or in deciding if it is worthwhile to again buy vacuum cleaner without warranty at discounted prices.

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