As you might know from reading my About page, I’m an MBA student and college textbooks are a really expensive issue for me. Even with the help of the internet facilitating better pricing, issues with sunk costs still arise here. Sunk costs are defined by Investopedia.com as being “a cost that has been incurred and cannot be reversed.” My basic definition for a sunk cost is a number that you remember but you really shouldn’t. For example, I bought a book for a class in January 2009 for $145. This weekend I was researching current prices for the book so I can sell it. This $145 book is now selling for around $50. This is very frustrating! In reality I know I shouldn’t even think about the $145. It’s a number I remember but shouldn’t! I don’t need the book anymore and I don’t like the book so I should just get rid of it, even at $50, but my emotions won’t let me.

Here is an investing example of sunk costs that I’m sure most investors can relate to. If I buy a stock at $50 and it goes down to $25, the decision to sell shouldn’t be based on the $50 cost.  Instead of thinking about sunk costs, I will be thinking to myself “as soon as it gets back to $50, I’m going to sell”. Rarely does this ever happen. A more realistic conclusion is that I will panic and sell the stock when it gets to $10.  I should really be looking at the stock as if I bought it today at $25. I if still like the stock then I should keep it. If I don’t then I should get rid of it. This is of course easier said than done. My emotions will keep me linked to the $50 price I originally paid and will not make it easy to sell.

These are just a few personal examples of sunk costs and how they influence my decision making. Understanding and ignoring sunk costs will allow us not to get so wrapped up in the purchase price and better evaluate future choices.