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Here's an example of the sunk cost fallacy:

You decided to buy a solar panel because you heard that you can make money from them over time. Unfortunately, you didn't do enough research and bought an overpriced, cheaply-made solar panel. This panel cost you $5000 and is actively costing you $500 a month for repairs (it breaks very often). It only generates $50 of energy a month, so you're losing money by keeping it in operation, but you don't want to sell it or trash it because you've already spent so much on it and you don't want to end up with a net loss.


Here's an example of the "sunk gain"(?) fallacy:

You decided to buy a solar panel because you heard that you can make money from them over time. Luckily, you found a great deal on eBay and now own a high quality solar panel. This panel only cost you $200 and is very durable. It generates $300 of energy a month, so you quickly made a net profit. After telling your friends about your wonderful investment, one of them offered you $250 for it. You decided to sell it to them, even though you don't have an immediate need for the money, because $250 is more than what you paid for it originally.


In the first scenario, you continued to incur a regular loss because you kept thinking about the money that you had already lost, instead of thinking about the future.

In the second scenario, you gave up a great investment because you were thinking about the money that you had already gained, instead of thinking about the future.

Is there a common term for the second scenario? I looked up "sunk gain" but it doesn't seem to be a very common phrase.

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  • shortsighted. – Jim Mar 13 '15 at 2:09
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    @HotLicks - Sunk cost and ??? aren't just about money, they can also be applied to time and other resources. – Pikamander2 Mar 13 '15 at 2:26
  • Your second example is simply "turning a quick profit". Nothing wrong with that, except that it might be shortsighted. – Hot Licks Mar 13 '15 at 2:28
  • Missed opportunity? – Ian MacDonald Mar 13 '15 at 2:50
  • There are terms for this in the stock market. I'm sure the "sunk cost" scenario has a psychological theory. It's why most people lose money in the stock market. The second scenario is why most people who make money in the stock market don't make a lot.... – Brian Hitchcock Mar 13 '15 at 4:07
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It is called "Opportunity Cost."

Opportunity cost is the value you lose because of a decision you made.

This is the book definition from Investopedia.

The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

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    More specifically, the "opportunity cost" would be the outcome of falling victim to the fallacy being described. I'm not aware of a specific "fallacy" around "opportunity costs" but it seems reasonable to call it an "opportunity cost fallacy." – MrHen Mar 24 '15 at 17:25
  • +1, I agree with "opportunity cost." I've written more explanation in a new answer. – Ben Miller Jun 2 '16 at 18:34
  • Opportunity cost is totally different: It is the assumed cost that you have by making a (possibly good) investment and then having no cash or no other resources to make other investments. For example, by investing your money for two years for 5% interest, you lose the ability to make better investments if you have the chance. The assumed cost of that inability is the "opportunity cost". – gnasher729 Jun 3 '16 at 8:10
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The opposite of a cost is an investment.

Buying a car is an expense, usually a sunk cost, whereas purchasing real-estate, e.g. productive farmland, is an investment. (Some investments are wasting assets, as the value decreases over time, but they are still investments with market value, not costs.)

"Sunk cost" isn't a fallacy. It just means an expenditure that one cannot expect to recoup. The action item is, "Don't throw good money after bad." The opposite of a sunk cost is an investment.

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    '"Sunk cost" isn't a fallacy. It just means an expenditure that one cannot expect to recoup.' When people factor the sunk cost into their future decisions, that's when it becomes the sunk cost fallacy. – Pikamander2 Mar 13 '15 at 15:12
  • @EllieKesselman Is a sunk cost similar to 'spilt milk'? – Mitch Mar 24 '15 at 17:45
  • @Mitch Yes, it is! – Ellie Kesselman Mar 25 '15 at 6:17
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In the second example you are giving up future free cash flows in exchange for a capital gain on the original investment. With that respect the money you will not gain will be the difference of the future cash flows ( net of related costs) minus the net gain on the panel you have sold. The financial result can be considered as the opposite of a sunk cost, that is a cost you have already incurred ( and cannot be recovered) vs net future gains you are giving up.

  • Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.

In more sophisticated financial terms we are talking about the benefit-cost ratio:

  • Benefit cost ratio (BCR) takes into account the amount of monetary gain realized by performing a project versus the amount it costs to execute the project. The higher the BCR the better the investment. General rule of thumb is that if the benefit is higher than the cost the project is a good investment.

( from Investopedia)

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The complete opposite of "sunk cost" is the term "unrealized gain"; until you sell it, then it is a "realized gain". There is also a term "paper profit" to point out the ephemeral nature of some of these unrealized gains.

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A "sunk cost" is a cost that you have already incurred, and won't get back.

The "sunk cost fallacy," as you described, is when you make a bad decision based on your sunk cost. When you identify a sunk cost, you realize that the money has been spent, and the decision is irreversible. Future decisions should not take this cost into account. When you commit the "sunk cost fallacy," you are keeping something that is bad simply because you spent a lot of money on it. You are failing to identify the correct current value of something based on its high cost to you in the past.

The other fallacy you describe, the opposite of the sunk cost fallacy, is when you get rid of something that is good simply because you spent little on it. As before, you are also failing to correctly identify the correct current value of something, but in this case, you are assigning too little a value based on the low cost in the past. You could call this a type of "opportunity cost," a loss of future benefits due to a mistake made today. It seems reasonable to describe this type of fallacy as an "opportunity cost fallacy."

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"liquid asset"

A sunk cost may turn out to be a loss or it may make you a profit, but what makes it "sunk" is: you can't get it back. The opposite is a cost that you can later redeem, which makes it "liquid".

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