What is the opposite of a sunk cost? A "sunk gain"?

Question

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.

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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.

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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.

Answer 1

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%).

Answer 2

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)

Answer 3

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.

Answer 4

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.

Answer 5

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."

Answer 6

"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".

Answer 7

"Profitable Asset" is the opposite of Sunk Cost.

Sunk costs are expenses that cannot be refunded or recovered. The sunk cost fallacy is when a person continues behavior based on sunk costs. This is a fallacy, because sunk costs are not relevant to new decisions.

The exact opposite of: "expense that cannot be refunded or recovered that is not relevant to future decisions", is "income that can be refunded or returned which is relevant to future decisions".

A "profitable asset" fits the description of the opposite of a "sunk cost" because it is counted as income (not an expense), can be potentially returned; and, being income, is relevant with regards to future business decisions.

So, if real estate depreciation is a sunk cost, then an income-producing (or otherwise profitable) investment property is the complete opposite.

Another example of a sunk cost is a piece of industrial equipment that is melted down after breaking down. The equipment originally cost $30,000, but the metal sells for a total of $3,000. The remaining $27,000 is a sunk cost. Additionally, any maintenance spent on the old equipment were sunk costs. Then the company applies the $3,000 toward a new equipment to replace the old one.

The sunk cost fallacy happens because people often tend to base their future decisions on sunk costs, even though these sunk costs have no relevance on the decision. For example, after scrapping the equipment and losing the $27,000, an executive might consider their loss and base their purchase of a new equipment on the sunk costs into the equation, even though maintenance and losses on the old equipment have no relevance to the new equipment.

For example, the executive might feel the burden of the $27,000 loss and this may influence their decision when considering a new piece of equipment to replace it with. This is a fallacy. Instead the executive should ignore the loss and only base their new equipment purchase decision on whether it will be an objectively wise purchase moving forward, and ignore their $27,000 loss on the old equipment.

Conversely, the opposite of the depreciation losses of old equipment in the above example is an income-producing asset such as a piece of company-owned equipment which is rented to a third-party. This asset produces income, and the existence of this income-producing asset will be relevant to future investment decisions; while the losses from the old equipment (sunk costs) should be disregarded.