Sunk Cost Fallacy

[igthebold]

Sunk cost is one of those cognitive problems I have the hardest time explaining to my friends. Here's an article that attempts it: http://simplemom.net/outsmart-your-own-brain-and-spend-less-money/

Defeating this one will help clarify all kinds of thinking on the way to FI:
- But I've already got $15K in this car loan and it's underwater
- But I spent so much on this TV and I can't get 1/10 of what it's worth on Craigslist
- I've already spent $500 fixing this appliance, I can't get a new one!
- etc

Any glaring sunk cost traps we fall into that should be mentioned?

[tooqk4u22]

Don't forget the grandaddy of all......I bought my McMansion in 2007 for $450k and not it is only worth $300K...I can't possibly move because I will lose all of my equity.

[darkelenchus]

I have to continue with this business/job/degree/etc., because I've already invested so much time in it and it'd be a waste to quit before I at least break even/have a better job lined up/finish/etc.

[James]

Don't forget the grandaddy of all......I bought my McMansion in 2007 for $450k and not it is only worth $300K...I can't possibly move because I will lose all of my equity.

HEY!  That hits pretty close to home...  I purchased my house for $450k in 2008, it's on the market now, and I'm deathly afraid I might end up down by $300k when I sell...  :D

[Bakari]

Insurance.
Especially full coverage auto insurance.

Many people look at what the car they have cost (or is worth) rather than what it would cost to replace.

One can buy a used beater for a couple grand, which may be a year or two worth of full coverage insurance.  If you total a car every two years, you shouldn't be driving at all.

[velocistar237]

I'm glad that the post author points out that repair is usually the better option. Too often, people think they've put too much effort into something, and even if it would be financially better to keep fixing it, they get tired of it and decide to throw in the towel and replace it. Is it that people tend to want to keep something they've put a lot of money into but sell something they've "wasted" a lot of time on? Both view past expenditure as a factor in future decision, so both commit the sunk cost fallacy.

[igthebold]

I have a friend who, for a long time, owned a Dodge Caravan. Apparently the Caravan was a decently made minivan which, for some reason, had a Dodge Neon transmission in it (or something like that). So the transmissions regularly died every 50-70K miles.

Whenever he had to get the transmission replaced, he'd get a quote, then call his wife and say, "How would you like to get a used minivan with a reasonable number of miles on it, good interior, and a brand new transmission for $1,500?"

That's the right way to think about it. Looking forward to the expected life post-repair, not looking back at the costs already incurred.

[Jamesqf]

That's the right way to think about it. Looking forward to the expected life post-repair, not looking back at the costs already incurred.

Except that that way of thinking of it incurs an extra cost of $1500 to replace the transmission every few years, versus the alternatives: either sell that one to someone mechanically inclined and buy a replacement at similar cost, or figure out how to do a one-time replacement with a different transmission.

[grantmeaname]

I have a friend who, for a long time, owned a Dodge Caravan. Apparently the Caravan was a decently made minivan which, for some reason, had a Dodge Neon transmission in it (or something like that). So the transmissions regularly died every 50-70K miles.

Whenever he had to get the transmission replaced, he'd get a quote, then call his wife and say, "How would you like to get a used minivan with a reasonable number of miles on it, good interior, and a brand new transmission for $1,500?"

I have an '03 Town and Country. The engine is legendary, and the frame is incredible, but our transmission went at 89k and we were lucky, at that.

[igthebold]

That's the right way to think about it. Looking forward to the expected life post-repair, not looking back at the costs already incurred.

Except that that way of thinking of it incurs an extra cost of $1500 to replace the transmission every few years, versus the alternatives: either sell that one to someone mechanically inclined and buy a replacement at similar cost, or figure out how to do a one-time replacement with a different transmission.

Sure. I guess what I liked about it was the forward-thinking aspect of it. Whether you come to a correct conclusion after putting aside sunk cost issues is a separate matter.