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

[Brock Beauchamp]

Okay, so this has been driving me nuts for a long time.

 

The ~$26m owed to Ricky Nolasco is not a sunk cost. Nor is the Ervin Santana or Joe Mauer money.

 

Why? Because the money has not been spent. It has been committed but not spent. Unspent - but committed - money can sometimes be offloaded, thereby removing the burden.

 

A sunk cost cannot be recovered or refunded. Period. Full stop.

 

Companies in every industry have to spend money to make money. A company budget may allow for investing money in employee salaries, inventory, office space or any other cost of doing business. Once the company's money is spent, that money is considered a sunk cost. Regardless of what money is spent on, sunk costs are dollars already spent and permanently lost. Sunk costs cannot be refunded or recovered. For example, once rent is paid, that dollar amount is no longer recoverable -- it is 'sunk.'

 

https://www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/sunk-costs-415-7248/

 

For example, if a firm sinks $1 million on an enterprise software installation, that cost is "sunk" because it was a one-time expense and cannot be recovered once spent. A "fixed" cost would be monthly payments made as part of a service contract or licensing deal with the company that set up the software. The upfront irretrievable payment for the installation should not be deemed a "fixed" cost, with its cost spread out over time. Sunk costs should be kept separate. The "variable costs" for this project might include data centre power usage, etc.

 

https://en.wikipedia.org/wiki/Sunk_costs

 

The Twins have fixed costs, not sunk costs.

 

Please stop using this phrase. It's maddening. Thank you all for your time.

[ShouldaCouldaWoulda]

I believe the term is used more for players whose contract and production are such that it becomes extremely likely that their contract would be perceived as ultimately unmovable. This contract essentially makes it become a "sunk cost" to be, and should be viewed as one, since the contract is guaranteed and the production is likely not believed to return.

 

At that point at team needs to decide whether it is better to just keep throwing a lesser player out there over and over, because they have committed money to him in the future. Or, just suck up the pride and move on and acknowledge the team made a mistake, but is moving on. Problem is, many teams dont move on. I don't have a problem calling it a "sunk cost."

[Kirby_waved_at_me]

I would only use it to argue that Nolasco (or Pelfrey until his rebound this year) should become sunk costs (i.e. should be released and the team should be happy for the roster spot.)

[Brock Beauchamp]

 

I believe the term is used more for players whose contract and production are such that it becomes extremely likely that their contract would be perceived as ultimately unmovable.

No contract is unmovable. The Jays demonstrated that with the Tulo trade.

 

Yes, it's unlikely the Twins will be able to move the Nolasco contract but it's not impossible and until that money is spent, the cost is not sunk. It's fixed.

[clutterheart]

 

the cost is not sunk. It's fixed.

 

Stop criticizing internet posters on grammar/proper usage of words.

 

Clearly its just a typo and the posters mean sTunk costs

 

[Brock Beauchamp]

 

Clearly its just a typo and the posters mean sTunk costs

I fully endorse the use of the phrase "stunk costs" and have changed the title of this thread to reflect that point.

[Mike Sixel]

same point....shouldn't this be moved to other baseball, like the much more useful logical fallacy thread. Shouldn't the complaint thread about pitch forks also have been moved?

[Brock Beauchamp]

 

same point....shouldn't this be moved to other baseball, like the much more useful logical fallacy thread. Shouldn't the complaint thread about pitch forks also have been moved?

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

[twinsnorth49]

same point....shouldn't this be moved to other baseball, like the much more useful logical fallacy thread. Shouldn't the complaint thread about pitch forks also have been moved?

The pitch forks thread is specifically about the Twins, therefore, Twins Talk forum.

[Craig Arko]

Definition of sunk cost? The RMS Titanic.

 

[Kirby_waved_at_me]

 

Definition of sunk cost? The RMS Titanic.

too soon.

[Minniman]

The costs are just as sunk as they are fixed. In either case, they can be changed if the players are moved, but the chances that these players will be moved is highly unlikely.

 

Sunk cost is often the term used as the contracts cannot be renegotiated. They are budgeted and already accounted for on the ledger. While they could be recovered, the chance is so slim as to be considered sunk. The money has already been invested and is spinning down the toilet.

 

If I am building a house, and I invest $300,000 in materials, those are a sunk cost. If the land is found to be a swamp, and I need to put in an extra $200,000 to fix it, the original $300,000 is sunk, and I have to look at the entire investment or I could be chasing bad money with good.

 

With the Mauer contract, the money he is owed is a contract for service. If Mauer bats .150 and needs a pinch runner to get to second base, the money is still owed. It is no less owed than the money contracted for the materials for the home. In both cases, some money can be recoved by selling the materials on Craigslist, trading Mauer, or selling Mauer on Craiglist, but they are both considered sunk because the contract for service or goods is due in its entirety if the goods had been delivered on site or not.

 

[Brock Beauchamp]

 

The costs are just as sunk as they are fixed. In either case, they can be changed if the players are moved, but the chances that these players will be moved is highly unlikely.

 

Sunk cost is often the term used as the contracts cannot be renegotiated. They are budgeted and already accounted for on the ledger. While they could be recovered, the chance is so slim as to be considered sunk. The money has already been invested and is spinning down the toilet.

 

If I am building a house, and I invest $300,000 in materials, those are a sunk cost. If the land is found to be a swamp, and I need to put in an extra $200,000 to fix it, the original $300,000 is sunk, and I have to look at the entire investment or I could be chasing bad money with good.

 

With the Mauer contract, the money he is owed is a contract for service. If Mauer bats .150 and needs a pinch runner to get to second base, the money is still owed. It is no less owed than the money contracted for the materials for the home. In both cases, some money can be recoved by selling the materials on Craigslist, trading Mauer, or selling Mauer on Craiglist, but they are both considered sunk because the contract for service or goods is due in its entirety if the goods had been delivered on site or not.

Except they're not considered sunk costs. A sunk cost is money spent. A fixed cost is money owed through contractual obligation.

 

2004-2014 Mauer money is sunk.

 

2016-??? Mauer money is fixed. As long as there is a possible path - however unlikely - out of paying that money, it is not sunk because it hasn't actually transferred hands.

 

I'm sure that in May of 2015, Jays fans were hemming and hawing over the "sunk cost" of Jose Reyes. How'd that turn out for them?

[Mike Sixel]

Brock is technically correct, but not sure the distinction really matters......Mauer can't be traded w/o his approval, which he will not give unless someone offers him millions and millions more. I believe, in effect, that this money should be considered sunk.......but it really isn't about the damn money, it is about the roster spot......

[Brock Beauchamp]

 

Brock is technically correct, but not sure the distinction really matters......Mauer can't be traded w/o his approval, which he will not give unless someone offers him millions and millions more. I believe, in effect, that this money should be considered sunk.......but it really isn't about the damn money, it is about the roster spot......

Agreed the roster spot is more important than the money.

 

Much of my frustration around "sunk cost" is that it's used as a curt answer to a complex problem on top of the fact it's continually used incorrectly.

 

It has become an annoying pet phrase on this forum, which is bad enough... But when users can't even bother to use the correct phrase, it really grates on me.

[Minniman]

Let me contrast this with the old contract Adrian Peterson was working under. His salary was not sunk because it could be recovered by releasing him. He could be traded too, but his signing bonus was sunk.

 

In the NHL, all signing boneses are sunk even if they are paid in the future. They count against the cap as dead money even if the player has been traded. The sunk cost is also tied to the amount and duration of the potential buyout.

 

In the cases of Mauer and Nolasco, the contracts are guaranteed. They are not a contract that can be revoked like the Peterson contract was or the service contract in your example. The money will be paid.

 

Yes, the money has not already been paid, so technically they are prospective costs, but because the money owed is much greater than the value of the good or service, the reality is that the money is already sunk looking forward.

 

One can see this when teams with heavy contracts sign more players to lucrative contracts as not to waste the money sunk on the players they previously signed. It is the sunk cost falacy in play.

[Minniman]

 

Agreed the roster spot is more important than the money.

 

Much of my frustration around "sunk cost" is that it's used as a curt answer to a complex problem on top of the fact it's continually used incorrectly.

 

It has become an annoying pet phrase on this forum, which is bad enough... But when users can't even bother to use the correct phrase, it really grates on me.

 

Brock, I understand, but in this case the contract is not a future fixed cost. It is neither variable nor revokable by the team, therefore it is sunk. It does not matter when it is paid out; it only matters if it is guaranteed to be paid.

 

If Joe Mauer is cut from the roster, the money still needs to be paid. If Nolasco does not recover from a chronic sore arm, the money still has to be paid. Again, technically the cost is not sunk until it HAS been paid, but the reality is that the cost is sunk as soon as there is an irrevokable guaranteed contract that it HAS TO be paid.

[Brock Beauchamp]

 

Brock, I understand, but in this case the contract is not a future fixed cost. It is neither variable nor revokable by the team, therefore it is sunk. It does not matter when it is paid out; it only matters if it is guaranteed to be paid.

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.

 

Teams unload albatross contracts on a regular basis. Most are done through trade but occasionally, you'll get an odd Alex Rios type situation where the White Sox just picked up the contract and let the Jays off the hook.

 

If the Twins really want to unload the Nolasco deal, they can do it. Again, I hate to keep hammering away at semantics but a sunk cost cannot be undone under any circumstances. Therefore, the remaining terms on the Nolasco contract are not (yet) sunk costs.

 

All I'm asking is for people to use correct terminology and stop hammering away with pejorative pet phrases that aren't even accurate. I long ago lost count how many times I've read someone on this board say "this front office doesn't understand sunk costs" and the poster is misusing the phrase. It's more than a little ironical to see someone misuse a phrase while calling out another party as inept or clueless.

[nytwinsfan]

 

Okay, so this has been driving me nuts for a long time.

 

The ~$26m owed to Ricky Nolasco is not a sunk cost. Nor is the Ervin Santana or Joe Mauer money.

 

Why? Because the money has not been spent. It has been committed but not spent. Unspent - but committed - money can sometimes be offloaded, thereby removing the burden.

 

A sunk cost cannot be recovered or refunded. Period. Full stop.

 

 

https://www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/sunk-costs-415-7248/

 

 

https://en.wikipedia.org/wiki/Sunk_costs

 

The Twins have fixed costs, not sunk costs.

 

Please stop using this phrase. It's maddening. Thank you all for your time.

 

This is meaningless semantics and just wrong.

 

First, if you assume that you are only going to "offload" Nolasco's future commitment in exchange for (1) taking on other liabilities of an equal amount, or (2) giving up an equal value in assets, or (3) some combination of the two, there is in fact no way to "recover" or be "refunded" for the cost.  I think that is a pretty reasonable assumption. Sure, Terry Ryan might be able to get someone to take only $12 million in assets in exchange for Nolasco's $13 million owed in 2017. In that case, $1 million would be recovered. But that would be a function of Terry Ryan's good bargaining and/or the other party overvaluing that unrelated asset, not anything about the "cost" at issue.

 

Second, for most purposes on this site, people are using the term "sunk cost" to convey the concept that we should not be starting Nolasco or Santana, or Mauer just because we owe them money in the future. I think most people here understand that is what they mean, and that when they say that they are not ruling out the possibility that Nolasco or Santana's contract could be moved in exchange for other liabilities or for giving up assets. The term "fixed costs" doesn't adequately convey the idea they are trying to get across, because it doesn't convey the concept/idea that if we could do it over, we would be better off not to have committed to those costs. "Sunk cost" conveys that idea, without creating confusion, given the context. For the practical purposes at hand, then, they used the term absolutely correctly. Language means different things in different contexts, and in that context, they are correct.

[Squirrel]

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.

[Brock Beauchamp]

 

This is meaningless semantics and just wrong.

Meaningless? Possibly.

 

Wrong? No, absolutely not.

[Minniman]

 

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.

 

[USAFChief]

 

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

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

 

Gotcha.

[Vanimal46]

 

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. 

[jharaldson]

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.org/wiki/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.

[Brock Beauchamp]

 

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.org/wiki/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.

[PseudoSABR]

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.  

[TheLeviathan]

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.

[DuluthFan]

 

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.

[drivlikejehu]

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.