I currently own a red 1997 Chevy Camaro. As with many old cars it has it’s ‘senior moments’. In fact, last night my father and I worked on replacing the battery for close to two hours while my brother tried to get the driver-side outside handle to work.
Today’s economic principle is what is called a sunk cost. Take the example of an old car. When we ask ourselves whether it is time to get a new (or at least less-old car), we might say, “Yeah, but I’ve spent so much on this car.” A sunk cost is any cost that we have already paid and cannot be recouped and thus should not factor into decision making. What do we focus on? Marginal Benefit and Marginal Cost.
Going back to the car example. Let’s say we expect to replace a number of key, expensive parts in the coming months. Regardless of what we have paid in the past, at this moment, if the cost of those fixes exceed how much it would cost to replace the car with a newer, more reliable car, we’re probably in an ideal situation to sell the car. Not only that, there is a good chance beyond the money saved in continuing repairs, there is a high chance of some revenue being generated by selling the old car.
Examples of Sunk Costs
It was hard as a missionary to see individuals hold onto their ‘sunk costs.’ Perhaps it is something like smoking or another sinful vices. It has costed them so much up to this point, but they lacked the courage or faith to leave it behind, even when the eternal benefit of the gospel of Jesus Christ was in front of their face.
A young lady might find it difficult to give up the expensive clothes she wears. Even though they are immodest, she spent good money for them and they are hard to part with. Her leaders encourage her, citing the blessings and protections that come from obedience to the standards of the gospel.
The people of Ammon buried their weapons of war, full aware of the violence that was stirring in the hearts of fellow Lamanites around them. They felt that “since God hath taken away [their] stains, and [their] swords have become bright,” they saw greater benefit in “[staining their] swords no more with the blood of [their] brethren,” (Alma 24:12)
In high school I purchased a CD of a popular band, only to discover that all of their music centered around immoral actions and violating the law of Chastity. The night before I had just spent $16 in the CD but I determined it wasn’t worth keeping. I gave it away at school the next day.
By learning to identify sunk costs and exclude them from a decision making, we can make the better decision at the present.
Thanks for reading.
In transacting the markets many a trader will, at times, double down on whatever asset they are transacting figuring that since their stock lossed in value that will lower the cost basis and so when it goes up again they might recoup quicker a gain back on what was a loss before. I do not agree w/ that method of trading because it is more illusionary than redemptive because that course of action may so often end up digging a hole deeper especially if that stock breaks support and ends up becoming a falling knife or a falling piano towards lesser and lesser value.
Many times, for instance, a trader will DO anything to try to make themselves right and prevent admitting that they are wrong to begin with. Instead of cutting the loss short and run away to trade another day they will often end up conquering the stock to lower and lower prices to where the losses excacerbate.
Compounding is a great principle as Einstein noted; yet, not when we continue to compound our LOSSES and think that two, three, & four wrongs will eventually make a right. One man said that he would rather be RIGHT than be President. Well, he never became President either.
dc 121 talks about gratifying one’s own pride and vain ambitions.
To continue to revel, in a way, from one’s own habits set upon a course that will only lead to further sorrow because they will not drop it it, change course, and make it right even if it means to go back as Elder Hugh Ponnock use to say ‘to a land of beginning again!’
Habits that can be TOO STRONG to be felt until they are too string to be broken can truly SINK US!
The Prophet Joseph said it so precisely & concisely, “If we start RIGHT it is easy to stay right; yet, if we start WRONG we may never get RIGHT!
As Elder Maxwell use to note, “Hearts set upon the things of this world are hearts set to be broken.