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The definition of "sunk cost" vs. "stunk cost"

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#21 Brock Beauchamp

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Posted 25 August 2015 - 10:13 AM

 

This is meaningless semantics and just wrong.

Meaningless? Possibly.

 

Wrong? No, absolutely not.


#22 Minniman

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Posted 25 August 2015 - 10:34 AM

 

It's guaranteed to be paid unless the player opts out of the deal by retiring but there's no guarantee it will be paid by the Twins. Another team can pick up the contract through multiple avenues.

 

 

In my example, another company could agree to build the house and pay me for the materials already purchased. Does that make it not a sunk cost? If I make reservations at a resort, but I do not go, and I missed the cancellation deadline, it is still sunk even if I have not yet paid.

 

Brock, you are correct that technically a sunk cost is already paid, but a contract that is guaranteed does basically the same thing if the option to unload the contract is minimal. People use the term "sunk cost" in sports with players that are paid too much to trade and often are played when they should be benched. The value of the contract no longer represents the value of the player.

 

Technically, the Bobby Bonilla contract with the Mets is not sunk because the Mets have not paid him all of the defered money yet, but the reality is that the money is sunk. Gilbert Arenas has not played in the NBA since 2012, but he is still owed $22 million per season until next year. He has yet to be paid in full, but the cost is sunk, as Arenas is guaranteed to be paid barring bankruptcy by the Orlando Magic.

 

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#23 USAFChief

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Posted 25 August 2015 - 02:21 PM

 

It will be moved at some point but that time isn't right now.

SOOOO...the thread is fixed, but not yet sunk.

 

Gotcha.

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#24 Vanimal46

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Posted 25 August 2015 - 02:29 PM

 

I think the best way to resolve this is to ask Vanimal at the Whine Line! He'll have the best answer and put it all into perspective.

 

There's not enough beers in the world available where I can solve this riddle. 

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#25 jharaldson

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Posted 25 August 2015 - 04:04 PM

Two points about this:

 

1.  Semantic Change - Semantic change is the evolution of word usage — usually to the point that the modern meaning is radically different from the original usage.

https://en.wikipedia...Semantic_change

Even though you are factually correct, if a number of people use a word in an incorrect way it becomes correct by the volume of usage.  A simple search for "sunk cost contract mlb" in Google returns almost 33,000 results.  It is widely accepted in discussion of large contract for under-performing players.

 

2.  Distinction - "Fixed Cost" does not adequately distinguish between costs of contracts for people that are performing (ex. Dozier) vs those that are not performing (ex. Nolasco, Mauer, ect...).  Right or wrong, "sunk cost" has been accepted as shorthand for that.

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#26 Brock Beauchamp

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Posted 25 August 2015 - 04:20 PM

 

Two points about this:

 

1.  Semantic Change - Semantic change is the evolution of word usage — usually to the point that the modern meaning is radically different from the original usage.

https://en.wikipedia...Semantic_change

Even though you are factually correct, if a number of people use a word in an incorrect way it becomes correct by the volume of usage.  A simple search for "sunk cost contract mlb" in Google returns almost 33,000 results.  It is widely accepted in discussion of large contract for under-performing players.

 

2.  Distinction - "Fixed Cost" does not adequately distinguish between costs of contracts for people that are performing (ex. Dozier) vs those that are not performing (ex. Nolasco, Mauer, ect...).  Right or wrong, "sunk cost" has been accepted as shorthand for that.

I think my point can be summed up with a simple line that explains the fallacy of this argument:

 

"Evolution is only a theory" returns 189,000,000 Google results.

 

Mass misuse of a technical term with a specific meaning does not validate that misuse. This isn't the transformation of a layman, colloquial term like "gay". It's a specific business term used to discuss business dealings. If we're going to criticize a front office for mishandling its business - and certainly if we're going to imply incompetence because they don't understand these business principles - then I think it'd be best to at least get the terminology correct.

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#27 PseudoSABR

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Posted 25 August 2015 - 07:20 PM

I always took the use of 'sunk cost' in regard to players that have yet to be paid their money as a metaphorical pejorative--not as an economic classification.  

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#28 TheLeviathan

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Posted 25 August 2015 - 07:56 PM

I don't think going after these attacks on the front office with semantics is necessary, that's going way deeper than necessary.

 

I'm with Psuedo, I don't think there is a strict economic argument being made that necessitates this kind of breakdown.


#29 DuluthFan

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Posted 25 August 2015 - 08:57 PM

 

Meaningless? Possibly.

 

Wrong? No, absolutely not.

 

I recommend that the term 'sunk cost' become a restricted phrase. No one may use it unless they use it correctly. As site moderator, the power is available to delete posts or even ban posters. Make it so.


#30 drivlikejehu

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Posted 25 August 2015 - 09:08 PM

Brock is flat wrong. Business law and accounting rules are clear that a cost is incurred when a party becomes liable for it, rather than when funds are actually transferred. Any confused posters should google "When is a cost incurred?" to see the correct answer for themselves.

 

A "sunk cost" is a cost that has already been incurred. The phrase has nothing to do with the disbursement of funds, but rather the assumption of a liability. The Twins are liable for Nolasco's contract and therefore it is a sunk cost.

 

Note also that the potential to transfer a liability is irrelevant to whether the cost is "sunk" (i.e., incurred). For instance, companies record Notes Payable as a liability, regardless of the fact those notes may be easily negotiable.

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#31 Minniman

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Posted 25 August 2015 - 09:26 PM

"Evolution is only a theory" returns 189,000,000 Google results.

 

 

Evolution is a theory ... that can proven by repeated testing with congruent observed results. That is how the scientific method works.

 

Oh, back to the topic. What was that again? oh yes ...

 

In economics, irrevokable contracts for a future commitment are considered sunk costs. The nature of guaranteed contracts is that they are irrevokable under normal ceteris paribus conditions. While it is a valid point that a player may be traded, one must view the likelyhood of that event. As the likelyhood approaches zero, the future commitment becomes a sunk cost rather than an optional or variable future expenditure. One must ask if Mauer or Nolasco are at that point or not.

 

One could make a conditional statement, "Barring an unlikely trade, those contracts are sunk costs." The point, in context, is that the player has a salary that is already a future commitment to be paid whether the player plays or not, and that contract need not be considered when fielding the best team.


#32 spycake

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Posted 25 August 2015 - 09:31 PM

Brock, is there any relevant baseball usage of the term "sunk cost", to you?

#33 Dr. Evil

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Posted 25 August 2015 - 09:34 PM

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#34 drivlikejehu

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Posted 25 August 2015 - 09:35 PM

 

One could make a conditional statement, "Barring an unlikely trade, those contracts are sunk costs." 

 

No conditional statement is needed. The contracts are sunk costs... they could be exchanged as part of a transaction, but that transaction will reflect the fact that those costs were sunk (i.e., a team could unload a bad contract by taking on a different bad contract - which only confirms the fact that the cost was sunk).

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#35 Jham

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Posted 25 August 2015 - 09:41 PM

Dear goodness, are there no accountants on Twins Daily who can resolve this issue once and for all?  Or are baseball blogs too nerdy even for number crunchers...  Excuse me, I have to reexamine my life path...


#36 drivlikejehu

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Posted 25 August 2015 - 09:47 PM

 

Dear goodness, are there no accountants on Twins Daily who can resolve this issue once and for all?  Or are baseball blogs too nerdy even for number crunchers...  Excuse me, I have to reexamine my life path...

 

I'm an attorney and CPA, specializing in fixed assets and accounting methods.

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#37 PseudoSABR

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Posted 25 August 2015 - 11:03 PM

 

I'm an attorney and CPA, specializing in fixed assets and accounting methods.

Couldn't your definition of sunk cost be applied to any contract for which the paying party is liable? When posters refer to players and their contracts (future or not) as 'sunk costs,' the lack of return on those costs is the operative factor, not the mere liability for those costs.  It's great that you have credentials and that you're very certain about usage in your industry but I imagine there are more tactful ways of demonstrating the validity of your point.  

 

The point should be that 'sunk cost' is used colloquially in all kinds of discourse without adhering to its technical usage (which probably varies industry to industry). Trying to establish the upper hand in semantics seems unnecessary. 

Edited by PseudoSABR, 25 August 2015 - 11:06 PM.

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#38 twinsnorth49

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Posted 25 August 2015 - 11:09 PM

I think it's time this thread is moved, all in favour say "aye".

 

"Aye"

 

The Ayes have it.


#39 drivlikejehu

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Posted 26 August 2015 - 05:57 AM

Ironic comments, pseudo, considering the confidence with which Brock erroneously lectured other posters on their use of the term.

The lack of return is certainly where the 'sunk' part comes in. Even in a business context, the phrase is colloquial rather than a term of art.

The reason it's not really open to interpretation is that the definition of an incurred cost (which may or may not be 'sunk' in colloquial American usage) is universal, applying to virtually all business activity on the planet.

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#40 Minniman

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Posted 26 August 2015 - 10:55 PM

 

I'm an attorney and CPA, specializing in fixed assets and accounting methods.

 

I teach economics, so our definition may differ slightly, but we are pretty much on the same page.

 

Brock is correct that the term "sunk cost" is already paid for, but current economic thinking often includes irrevocable agreements to pay in the future as a sunk cost as well.

 

If the Twins suddenly cut all of their players, what they still owe players on guaranteed contracts would be sunk costs. Therefore, all MLB players have sunk costs. This often creates a sunk cost fallacy of logic when a team tries to play the most expensive players ahead of the best players or high draft picks over later picks.

Edited by Minniman, 26 August 2015 - 11:06 PM.

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