The term sunk cost has a specific and narrow definition. It's a precise term referring to costs that, independent of the future, cannot be recovered. The sunk cost fallacy thus refers to (irrational) behavior that uses those costs as a factor when deciding something. If the costs cannot be recovered, logic dictates that they not be part of the decision making equation.
It's a simple concept, but one that gets applied far too widely. Say that last night I signed up for a banana of the month club at a cost of 19 cents, billed to me each month. Today I suddenly discover that I have a bizarre allergy to bananas. That first 19 cents is a sunk cost to me since I have paid it and this esoteric club has a no refunds policy. The next 11 payments are also sunk costs since they are guaranteed to happen, but they're not necessarily my sunk costs. If I have a friend, call him... Smeff, who really super likes bananas and he agrees to take my banana club membership then I am now free of the obligation to pay. I've shifted the commitment.
[UPDATE: The example below is wrong. The cost itself is sunk unless I could return the banana to the store.]
Last night I paid 19 cents for a banana. Say that I suddenly discover that I have a bizarre allergy to bananas. Those 19 cents are not (yet) a sunk cost! They were exchanged for a banana, one that I still possess. The banana may no longer have any value to me, but it does to a great many other people. Ergo, some of the initial cost is still possibly recoverable; though the window is time-sensitive so I'd have to act quickly while the banana remains a viable source of eating pleasure to others instead of something squishier.
Two years ago, the Mariners agreed to pay $36 million over four years for Chone Figgins' service. Half of that — the half already paid out to Figgins — is a sunk cost. That cost has already been incurred and cannot be recovered regardless of future events. The other half, the remaining half, is a future cost. There are still ways for a portion of that cost to be transferred to another club.
It is not likely for the Mariners to avoid the full cost of Figgins' remaining $18 million. It's furthermore likely that the Mariners will have to risk getting some sub-optimal performance in the field in attempting to recover some of it. Incidentally and perhaps confusing, the continued playing of Chone Figgins could represent an example of a sunk cost dilemma, but that does not make his 2012 and 2013 salaries sunk costs.
Chone Figgins is not a sunk cost to Seattle. The Mariners electing to start him (should they do so) is not an example of a sunk cost fallacy. If you say either of those things, you are incorrect. Figgins is, perhaps more accurately, a toxic asset; something for which its value has fallen tremendously since its purchase. If you want to argue that trying to recapture some of his future cost is a waste (perhaps by quoting the sunk cost dilemma above), that's legitimate. If you want to say Figgins himself — ignoring the context of who he is a sunk cost to — is a sunk cost, that'd be right too. But that context is everything.
5 recs | 164 comments
I am actually allergic to bananas.
There are dozens of us! Dozens!
Tucci Mane - February 20, 2012
Well that's a whole bunch of you!
The Typical Idiot Fan - February 20, 2012
You bought that banana at Trader Joe's, didn't you?
I paid .19 for a banana there just yesterday.
okdan - February 20, 2012
But who buys one banana... and saves it?
morrow - February 20, 2012
I can't buy more than 2 or 3 or I never finish them before they go bad.
quacker27 - February 20, 2012
I can't buy more than that many because those fuckers at Fred Meyer rarely have ripe bananas.
Side note, I am lazy. There is a Trader Joes, Albertsons, and Safeway not much farther than the Fred Meyer.
Patrick Stites - February 21, 2012
I was going to say the same thing!
but since I work there my nanners are only 17 cents
Pebohead - February 20, 2012
Good primer
So if I buy a banana for $.19 and sell it for $.15, is that remaining $.04 a sunk cost? Or is there another term for that?
Corco - February 20, 2012
Loss
abender20 - February 20, 2012
I'm at a loss too
Poochie - February 20, 2012
Wait no that's a baseball term.
abender20 - February 20, 2012
Thanks for writing this.
I almost threw up reading the Figgins thread. Are simple economic concepts really that hard for people to grasp?
Comma - February 20, 2012
Much more likely that nobody has ever taught people those simple economic concepts in the first place
Corco - February 20, 2012
When I read about something online that I don't understand, I read the Wikipedia article that has been written about it.
What I don’t do is go along with my shallow, initial understanding of the thing and then reference it incorrectly and repeatedly.
Comma - February 20, 2012
The Wikipedia entry isn't entirely straightforward (to me)
The page warns that it doesn’t cite sources, so maybe it isn’t accurate.
At a cursory glance, the spirit of (hopefully quoted enough not to lose meaning)
seems to describe Chone Figgins’ contract (in the context of something like playing time) pretty well, though not precisely. And all that said, I tend to love precision even more than the next guy, so I appreciate this type of clarification.
drtoofs - February 20, 2012
The Mariners haven't paid (note the "in the past" qualification on your quote) Figgins' 2012 or '13 salary yet
and they aren’t guaranteed to have to.
Matthew - February 20, 2012
Unless they release him,
which would only relieve them of the MLB minimum if he signs with another team. It would be absolutely foolish to do that if there is any chance of him coming anywhere near what made him worth 9M per in the first place.
And all this talk of "rewarding " him by hitting leadoff sounds like a discussion of Little League, not Major League Baseball.
xmet - February 21, 2012
Welcome to America.
ichirofan5197 - February 20, 2012
Yes, they are, and I'd appreciate a lack of condescension
I didn’t fully understand the sunk cost fallacy until I read this thread. However, I also have never used the term “sunk cost” in a sentence, because I didn’t know what it meant.
pdb - February 20, 2012
I apologize. My comment did seem overly harsh.
Comma - February 20, 2012
ain't no thang
Just understand that not everybody gets things like economics. I can barely balance a checkbook without curling up in the fetal position. Good thing I’m broke.
pdb - February 20, 2012
What's a checkbook?
Matthew - February 20, 2012
Something old people use
pdb - February 20, 2012
So it's like a DAT player?
Dewey N - February 20, 2012
I use my checkbook to buy LP's at the record store, before I go to the newsstand
pdb - February 20, 2012
LPs are cool again
Poochie - February 20, 2012
Aw sweet, so in five years everyone is going to ditch screens for newspaper subscriptions? Nice.
yuniform - February 20, 2012 via Android app
What hipsters will do when they're parents
Whatever it takes to remain relevant
Kermit. - February 20, 2012
So we're trying to cut off the brown part and hope what's left doesn't make us sick?
Mayo - February 20, 2012
[thatsracist.gif]
JAH - February 20, 2012
The google ad for this article when I read it was "Five foods you should not eat" with a picture of a banana.
Well, shoot!
seiferguy - February 20, 2012
I got my MBA from Foster's. I'm sure a few others here did too.
This post takes me back to the good ol’ days, when I thought this stuff mattered and I would argue technicalities in peer groups with other pretentious kids. It’s amazing how much I thought I knew.
circa81 - February 20, 2012
And yeah, it's Foster. Unless you went there in the early 2000's.
circa81 - February 20, 2012
Australian for college?
georgmi - February 20, 2012
Australian for bullshit!
But nice!
circa81 - February 20, 2012
I wondered how long until someone made that joke.
Fun fact: We export Fosters so we don’t have to drink it.
Aussie Mariner - February 22, 2012
We Amurricans have a very limited understanding of the Australopithecus genus and thus are very limited in our ability to make jokes on the subject.
Forgive us.
abender20 - February 22, 2012
Fosters, Crocodile Dundee, koalas, and vegemite. Not like there's much else to Australia, right?
Patrick Stites - February 22, 2012
Kangaroos.
I ride mine to work.
Aussie Mariner - February 23, 2012
Technicalities matter.
Matthew - February 20, 2012
It's what you learn,
after you learn everything that matters. Or the more you know, the more you know you don’t know.
xmet - February 21, 2012
Matthew, I think you are confusing your assets and your liabilities
Take your example. Once you pay 19 cents for that banana, that money is gone and it is the epitome of a sunk cost. Nothing you can do will get that 19 cents back. That is a liability that is already incurred. Now, you do have an asset in your hand that you could attempt to sell for some value. But the value of the asset is entirely distinct from that already-incurred cost. If you were to go about making a business decision on how to allocate your lunch resources, it doesn’t matter at all if you paid 19 cents for that banana or $100 for it. Now, the fact that you could trade that banana for two oranges or a twinkie might be of interest. But the costs are irrelevant and entirely sunk.
phineasd - February 20, 2012
What if you return it to the store or sell it to someone else for $.19?
You’ve now just gotten your 19 cents back
Dewey N - February 20, 2012
Great, you've sold your asset
Suppose you can sell it for 19 cents. Does the decision to make that sale depend on if you paid 19 cents for it originally or $100? The already-incurred costs don’t matter. Just the current potential market value.
phineasd - February 20, 2012
But already incurred costs and assets that retain current potential market value going forward....
… are just different terminology for the existing conditions. Matthew specifically differentiated Figgins’ contract already paid (sunk costs) versus his contract going forward (“future cost” or recoverable).
You are rephrasing the conditions, and while not incorrect, they are not more correct. Am I completely off the mark?
Kermit. - February 20, 2012
I think everybody would agree the first two years of payments are already sunk
It’s the next two which are interesting, and which I think most certainly are also sunk costs. (And unless I am way off base, Matthew’s article says is not sunk costs.) The full value of the contract, all of it, is a sunk cost.
The proto-typical example of a sunk cost in the business sense is if a company paid money to build a factory and then business conditions change and it will no longer be profitable to use the factory for production. So it would be a bad decision to proceed with the project just because you already spent a lot of money to build the factory. Now, it never says that the factory won’t have residual value or couldn’t be sold for some fraction of the costs that you incurred to build it. And maybe if you spent a little money to retool the factory for another use and make it look better to a potential buyer, you could sell it for slightly more?
I think people get distracted by the fact that the money has not yet been paid. Guess what, in business examples that is true all the time. If you build a $20 million factory, you don’t pay cash up front for the full amount. But whatever you sign a contract to pay on, that is a sunk cost. And if you arrange a bank loan or bond issue to pay off the factory over five years… even if you discover that you don’t want the factory after three years, you still have those two years of costs left to pay and you’re stuck with them. Even if you sell off the factory to generate some cash to pay back a portion of the remaining bank loan.
phineasd - February 20, 2012
But already incurred costs cannot be recovered and are independent from future costs
To me this means Figgin’ past contract is already incurred (sunk cost) which is independent of current market value (future cost).
Kermit. - February 20, 2012
It's the independent part that might be mucking this up
The way I’m reading your large body of words, you’re not just keeping separate columns, but what truckers call keeping separate books.
Kermit. - February 20, 2012
incorrect
From an accounting perspective, the sunk cost would be the net of the cost less recoveries- not the gross.
Henry H - February 22, 2012
Nobody sees how pointless this is when applied to a baseball player?
Nobody?
circa81 - February 20, 2012
You're right. That's a wrong example on my part.
But you’re wrong on Figgins.
Matthew - February 20, 2012
The Figgins situation is the same
First, am I correct in understanding that you agree the full cost of the contract is incurred on the signing date, regardless of how the payment stream is structured?
You have to convince me that the following two situations are different.
Situation A: the Mariners sign Figgins to 4 years, 36 million, and trade him after two years. The other team picks up 5 million per year for the remaining two years and the Mariners still pay out 8 million more. I think you would claim that the remaining 18 million was not a sunk cost (but the already-paid 18 million was) and the Mariners have “recovered” 10 million.
Situation B: the Mariners pay Figgins 36 million up front for 4 years of playing time. They’ve already paid out the full contract amount at the signing date. They then trade away Figgins after two years to another team for 10 million in cash. If the other team is willing to pay 10 million to Figgins, they would be just as willing to pay 10 million to the Mariners and zero to Figgins. No difference.
In my mind, these two situations are the same. They result in the same cash flows. It doesn’t matter if the 10 million comes in a cash payment or in a reduction against a liability or line of credit. The cash flows are identical.
Just because you can sell an asset you’ve already bought for a residual value, that doesn’t mean that the cost isn’t already sunk. And the amount remaining on the contract shouldn’t affect the Mariners decisions on how to deploy their assets, any way you look at it.
phineasd - February 21, 2012 via mobile
Disagree. There's easily a way to look at it where future cost could affect the decision.
I already laid it out here: http://www.lookoutlanding.com/2012/2/20/2813088/sunk-costs#92628973
Matthew - February 21, 2012
That is absolutely absurd
How at all does it change the Mariner’s motivation if they owe Figgins 50 million instead of 18 million? Suppose they find a team that’s willing to trade for him and eat X amount of the costs. The amount that team will pay for Figgins depends 100% upon the value he contributes in the field (what I am calling the “asset”) and not at all upon the terms of his contract! If the other team decides Figgins is worth $8 million to them, that’s how much they will pay. If his contract has $50 million remaining, the Mariners still owe $42 million. If his contract has $18 million remaining, the Mariners will owe $10 million. Either way they’ve sold off Figgins for $8 million. They can’t sell him for more dollars just because he has more remaining on his contract! The other team won’t pay more just because the Mariners already committed more to him! This is in fact a perfect example of how these are sunk costs and should not motivate playing time decisions. Any value coming back from Figgins will be due to the value of his performance, which is 100% independent from the dollar values in his contract.
phineasd - February 22, 2012
Your tone and style continue to be a gigantic problem for me.
Most of your paragraph is bogged down in a hypothetical I didn’t argue for (quite the opposite: http://www.lookoutlanding.com/2012/2/20/2813088/sunk-costs#92705557). I haven’t been looking at the complete picture and so my conclusions have been wrong, but there’s no need to go exclamation point crazy. I wish you’d find a way to more consistently communicate your points in a precise and level-headed manner such as in the comment that began this subthread.
Matthew - February 22, 2012
Now to relate this to Figgins
The Figgins contract is a sunk cost. It is a liability on the Mariner’s books, and nothing they can do will prevent that liability from coming due. Suppose instead of paying 19 cents cash for your banana, you put it on a credit card. It’s still a sunk cost. Suppose you arranged with your credit card company to give them five cents a year spread out over the next four years. It’s still a sunk cost. Suppose you bought a banana tree for $36 million that will provide you with an uncertain amount of banana production over the next four years and set up an installment plan of $9 million per year to pay for the annual production from the tree. Well, that entire amount is still a sunk cost, even if the tree stops growing bananas entirely after two years. Doesn’t matter if you paid $36 million up front or signed a contract agreeing to pay it out over 4 years. Still a sunk cost.
Now, the Mariners have the right to an asset, which is two more years of production on the baseball field from Chone Figgins. That is an asset with a low expected value but perhaps quite a bit of variance. And, most importantly I would argue, a high degree of negative skewness. He’s a lottery ticket. Maybe they could sell the right to his production for $1 million right now. Maybe if he plays well for the first two months of the season, they could sell it for $8 million. Who knows? The only thing that is certain is that the Mariners will be paying him, for sure, $18 million over the next two years. Saying “that isn’t a sunk cost” is the wrong way to look at it. It is 100% a sunk cost. But that doesn’t necessarily mean playing him is a bad decision. You need to think about the distribution of the possible value of his future performance. That’s where the negative skew kicks in. There is a large likelihood the asset is worthless, but a small chance that it could be worth a much larger number than it presently provides. The decision to play him or not should not at all reflect the value of the liability spelled out in his contract. It just reflects the distribution of future values from his performance, which is the asset that the Mariners hold and have the potential to trade away.
phineasd - February 20, 2012
I kind of agree with this view
Would it be correct to say that he is both a sunk cost and a toxic asset?
Edgar for Pres - February 20, 2012
Then by your definition, every guaranteed contract in baseball is a sunk cost
Somehow I can’t imagine anyone calling Evan Longoria a “sunk cost” in a discussion of baseball players and their contracts.
CMC_Stags - February 20, 2012
Really?
That’s exactly what Longoria’s contract is. It’s a sunk cost. The Rays are on the hook to pay it with absolute certainty. Their decision to play him depends not at all upon the amount of money he is earning, but rather his level of expected production on the field.
The term “sunk cost” has absolutely nothing to do with whether the value of what you paid for is worth more or less than the price you paid.
phineasd - February 20, 2012
Then, again, by your definition every cost is a sunk cost if you're purchasing a commodity that you have to then sell
It’s silly. We know the cost is the cost and the asset value to you is the asset value to you and that they’re separate quantities. That’s not what the term “sunk cost” is meant to denote. It is distinct from just plain “cost” for a purchase that you then have to turn around and sell to recoup funds.
The term is meant to denote that the asset you have acquired for a particular cost has permanently lost value as an asset to you that cannot be recovered relative to your expenditure for it. Obviously, this is not the case for Figgins. It might not be the most likely scenario that you can recover something of what you spent on him, but there’s still a possibility if you play him, so he is not “100% a sunk cost” by any stretch.
OlSalty - February 21, 2012
The Figgins contact is not a sunk cost.
Matthew - February 20, 2012
I think of Figgins contract as more of a Ponzi scheme
Craptastic-J - February 20, 2012
I think it's a very close call.
One could certainly argue that the cost is incurred when the guaranteed commitment is made. For the purposes the term “sunk cost” is typically used, a guaranteed contract is in fact a sunk cost. The commitment is made, you can’t take it back, and it logically should not affect how you decide to use the asset. The argument on the other side, I guess, is that “incurring” the cost means actually shelling out the money, and that further, you could reduce those costs by handling the asset in a certain way. I’m not sure that’s right, though, as you wouldn’t technically be reducing your costs; you’d be getting someone else to assume them, which is a different thing. And usually incur means, “become liable for”, not “pay”. The fact that the costs going forward and the asset itself remain related does definitely muddy the waters. You could look at it as the distinction between cash accounting and accrual accounting, and it isn’t as though one method is more correct than the other. They’re just different.
Tap Rat - February 20, 2012
To the Mariners, I should have added. Since that's the context we're working with here.
98% of the definitions of sunk cost out there specifies that sunk costs cannot be averted, no matter what.
The Mariners do have options open to them that would avert them paying Chone Figgins the salary they’re currently committed to paying.
Chone Figgins’ contract is a sunk cost since it is guaranteed, but to the Mariners, it’s not yet.
Matthew - February 20, 2012
So if Zduriencik can get anything of value for Figgins,
then the effective amount of the future cost to the Mariners is reduced by the value of the asset they get in exchange for Figgins. Hence the next two years of Figgins salary is not a sunk cost yet?
Bart's Evil Twin - February 20, 2012
Not a sunk cost yet __to Seattle__.
That’s how I see it based on the definitions and examples at a host of sources. I tried specifically looking for examples of someone labeling a transferable or mitigatable cost as “sunk” and came up empty.
Matthew - February 20, 2012
Makes sense,
but it is depressing to remember now that I thought Figgins was a good signing for the M’s at the time. Ugh.
Bart's Evil Twin - February 20, 2012
I think the cost becomes sunk once he's no longer on the roster.
That’s a nice bright-line rule.
Tap Rat - February 20, 2012
Let's put it this way
Figgins gets the money no matter what. Who ends up paying him? As of right now, it’s Seattle. But that can change.
I think the best way to illustrate this is with Vernon Wells. Toronto signed him to a 7 year $126 Million extension back in 2006. The contract pays Wells from 2008 to 2014. Wells is getting that money no matter what. But thanks to that……trade…Toronto only had to pay Wells $40 Million. The Angels are now on the hook for the rest of the money owed to Wells while only receiving an additional $5 million from Toronto for financial aid.
If the Mariners manage to trade Figgins at some point, they will likely have to send the team they are trading him to a good deal of cash to sweeten the deal. The responsibility for the remainder of Figgins’ contract rests on the shoulders of the receiving team. If that happens, however that shakes out, that will be better than Seattle paying 100% of the rest of the contract. Even if that means that they send enough cash to the other team to cover 90% of it.
ThundaPC - February 21, 2012
You mean by trading him to another team, which takes on his salary?
I buy that, I think. You can see the nuance if you examine the reason people were talking about sunk costs at all in Figgins’ case. In Figgins’ case, it isn’t a sunk cost to the M’s since they can revive Figgins’ trade value (theoretically) and trade him and a portion of his salary away. It is interesting, though, that the question of whether the cost is sunk rests so heavily on Figgins himself. Does it become a sunk cost at some point if he sucks badly enough? Clearly, it would be a sunk cost if he became disabled or died, right?
Tap Rat - February 20, 2012
My problem is that labeling Figgins a sunk cost (to the M's)
would dictate that the Ms shouldn’t consider his future costs at all when deciding whether to play him or not. I think that’s clearly wrong. It shouldn’t be the main concern, but taking the risk in a season with low expectations so that perhaps they can shed some salary commitments for 2013 is certainly a valid line of thinking. It depends on the particulars of how much risk it is, how much relief they could reasonably conjure up and so forth. That’s where a useful debate can be had. Calling him a sunk cost to the Mariners shuts that entirely down.
I think he’d become (or is) a sunk cost to the team if there’s literally no avenue for the team to offload any of his future costs. I think if he became disabled or died, then the contract itself would be voided and that actually makes him not a sunk cost. But if he sucked badly enough (like he has) that no team would trade anything for him (something we on the outside couldn’t know), then yeah, it’s unrecoverable.
Matthew - February 20, 2012
I think you're being too rigid with your definition.
When you add qualifiers like “at all”, “no matter what”, “literally no avenue”, then what you’re really saying is that it doesn’t meet some rigid, technical definition. I don’t think that’s how it works. The key point, I think, is that there’s really nothing the M’s can do to avoid the cost, not that it’s impossible to avoid.
morrow - February 21, 2012
My problem with not labeling Figgins a sunk cost is
that you’re actually committing the sunk cost fallacy and simply trying to avoid the logic by arguing the definition. Even in this specific comment, you seem to argue that being loss-averse is (“clearly”) perfectly reasonable. The problem with that line of thinking is that it ignores the potential excess value that could be created by going another route, e.g., Kyle Seager. Isn’t that the very essence of the sunk cost fallacy?
morrow - February 21, 2012
No
The essence of the sunk cost fallacy is that, if a cost is sunk, then there is zero benefit to trying to “recover” the cost through the performance of the asset in question, because the the performance of the asset cannot affect the cost at all.
If the cost is not sunk, then there is some benefit to trying to recover the cost. And therefore that should enter into one’s decision-making process.
Anyways, your argument about Seager makes sense, but going that route ignores the cost savings that could be had by continuing to play Figgins. I’m not saying that we should ignore the Seager route, I’m just saying that we shouldn’t ignore the Figgins part of the equation because some potential cost savings still exists. That’s the benefit of doing the sunk cost analysis—to identify when something is a lost cause or not.
gogurt - February 21, 2012
I'm not ignoring the potential benefit of playing Figgins.
I’m comparing it to the potential benefit of other alternatives, namely Seager. The decision should be made based on the potential benefit of each approach, not on the sunk costs. In this case, there’s a rationalization being made that somehow if we play Figgins he might be worth more than we expect. But we could also make that same argument with Seager. In this case, there seems to be a predisposition toward mitigating losses on Figgins rather than focusing on potential gains from Seager.
morrow - February 21, 2012
Almost.
“The decision should be made based on the potential benefit of each approach, not on the sunk costs”
Yes! But the sunk costs are the money already invested into Figgins. Here’s an actual sunk cost fallacy: “The Mariners have given $18 million to Figgins already, they need to get something out of him for that money.”
That’s using the actual sunk costs to justify a decision. That’s wrong. That’s not the same as “The Mariners are on the hook to pay Chone Figgins $18 million. Playing him might allow them to shed some of those”
This has nothing to do with Seager. This is not, and nobody says it is, a complete and final argument that the Mariners should play Figgins over Seager. The only thing I am pointing out is that Figgins remaining salary deserves to be a (small) factor.
Matthew - February 21, 2012
I always assumed that when people referred to "sunk cost" they were merely conflating that with the idea of escalation of commitment.
Basically the armchair economics version of the uncertainty principle and observer effect.
ThomasG - February 21, 2012
I agree this isn't a Seager versus Figgins debate
and I really didn’t mean to suggest you were advocating playing Figgins. I’m very pro-Seager, but even I see the wisdom in trying to extract some value from Figgins.
The question is whether or not his contract should be considered a “sunk cost” and whether or not citing the sunk cost fallacy is appropriate. I think the answer to both questions is yes. Though, admittedly, I’m no expert and I’m still trying to wrap my head around the concept. I do like these kinds of posts, though. Thanks for writing it.
"The Mariners are on the hook to pay Chone Figgins $18 million. Playing him might allow them to shed some of those"
So, if the Mariners were on the hook for $50 million, would that give them more incentive to play Figgins? Following your argument, it seems like the answer would be yes. I would say no since Figgins’ value has nothing to do with how much they paid for him. To me, that’s why his contract is a sunk cost.
morrow - February 21, 2012
If they were on the hook for $50 million
or $25M in ’12 and ’13, there should be more incentive to do whatever they can to mitigate some of those costs.
Imagine that we somehow have perfect information on how Seager (used as a stand in for best alternative) and Figgins will perform in the field. And say that information states that, for 2012, Seager is 2.0 WAR and Figgins is 1.9 WAR.
If you treated all future salaries as sunk costs, decision making would tell you to play Seager and bench Figgins. And if all you cared about was 2012, that’d be correct.
But there’s 2013 as well and if a season of Figgins at 1.9 WAR allows the Mariners to offload the 2013 portion of his contract, would you consider the loss of 0.1 WAR in 2012 to be worth saving $8.5 million in 2013?
If you said yes to that question, then do you see how he’s not a sunk cost and how it’s not a sunk cost fallacy to allow the future salary to be a factor?
Matthew - February 21, 2012
Following along with your example...
Let’s say that Seager and Figgins will both be static 2 WAR players. Let’s assume $5MM per win. That gives them both a value of $10MM per year going forward.
In this case, it makes no difference (production-wise) who plays in 2012. But Figgins will provide $10MM in value in 2013 and Seager will provide ~$19MM in excess value over his remaining pre-arb years (2013-14) and some additional amount in his arb years.
What I’m arguing is that those are the factors on which the decision should be based. In my example it doesn’t matter if Figgins has $50MM remaining or $18MM. The size of the contract is irrelevant.
However, I do see the point you are making and I agree with it. It certainly would be worth $8.5MM for 0.1 WAR in 2012. The concern is how much would NOT playing Seager cost? It is sunk cost fallacy only if Seager’s potential value is ignored or diminished.
morrow - February 21, 2012
Wouldn't it be the same if Figgins was due, say, $4 million over the next two years?
It doesn’t matter what the Mariners are on the hook for, only what they can recoup.
As I see it, there are three factors values that should come into play here: (a) the opportunity cost of playing Figgins over someone else, (b) the actual value Figgins produces on the field, and © the value that Figgins’ play inspires another team to give up for him. If (a)<(b)+©, by all means play Figgins. but the remaining $18 million doesn’t matter. How is it not a sunk cost?
Nick McD - February 21, 2012
The less he's owed, the less the benefit from eliminating his 2013 salary is
And it’s not a sunk cost because you’re ignoring 2013 and 2013 matters
Matthew - February 21, 2012
You could think of Figgins' 2013 salary as part of Seager's opportunity cost, if that makes it clearer.
Playing Seager carries the cost of effectively sinking Figgins’ 2013 salary on the Mariners. So, yes, how much that salary is matters.
Matthew - February 21, 2012
Not necessarily
The amount of value Figgins would bring back from another team would be part of the opportunity cost of playing Seager, not the full salary. For all we know, Figgins could go all Brady Anderson this year and be worth more than his $9 million salary to someone.
Nick McD - February 21, 2012 via mobile
You separated that out into factor C.
I was working on your terms.
Matthew - February 21, 2012
So factor C should be the opportunity cost of playing Seager
Which should include the possible value we could get from another team if Figgins plays well, but that should NOT automatically be Figgins’ salary.
Nick McD - February 21, 2012 via mobile
But the greater the opportunity for excess value.
Why are you prioritizing loss avoidance?
morrow - February 21, 2012
I'm not.
I haven’t prioritized anything at all. All I’ve said — all I’ve said — is that Figgins contract for ’12 and ’13 should have a factor of 0 and explained why.
That’s it.
Matthew - February 21, 2012
should NOT have a factor of 0*
Matthew - February 21, 2012
Okay, then I misunderstood.
morrow - February 21, 2012
At no point have I said the Mariners should play Chone Figgins.
My whole motivation here is that people were making incorrect arguments against playing Chone Figgins. Me trying to correct them is not the same as me arguing against them.
Matthew - February 21, 2012
I was only responding to this:
“The less he’s owed, the less the benefit from eliminating his 2013 salary is”
It seemed like you (in that one statement only) were focusing on the elimination of the salary obligation as opposed to maximizing the total return. It is value either way, which makes the benefit the same.
It’s not that what you said was untrue, just that it seemed to imply some sort of ceiling on the potential benefit. And that’s really what the whole sunk cost argument is about – people’s preference of avoiding losses to acquiring gains. Nothing at all to do with playing Figgins or not. Hopefully we can at least agree on that part.
morrow - February 22, 2012
This.
Also, “the less he’s owed, the less the benefit from eliminating his 2013 salary is.”
Nobody will be giving us $9 million in value for his 2013 season because his salary is $9 million. They may give us $9 million in value, but only if they come to the conclusion that he is worth $9 million indepently of his actual salary.
Nick McD - February 22, 2012
Right, but that's like the fifth time someone has stated that.
Nobody is saying otherwise. I don’t think a single person believes that the net trade return is contingent on the salary. That would be shitty decision making.
Matthew - February 22, 2012
Right. I think the problem for me is that it hadn't been put
up against the alternative of trading Seager instead
Matthew - February 22, 2012
Aren't you implicitly though?
If we play Seager all year, and some other team thinks he’s Mike Scmidt 2.0 while the M’s think he’s just Russ Davis, and the other team compensates us accordingly, isn’t that just as good as shedding Figgins’ salary?
Nick McD - February 21, 2012 via mobile
I didn't say that possibility should be ignored either.
Matthew - February 21, 2012
It doesn't ignore anything. You're projecting that.
I never said anything about Seager nor did I say that the Mariners should play Figgins.
Matthew - February 21, 2012
This explanation is spot on
The utility of discussing sunk costs is to set yourself free from emotional attachment to what you’ve paid for something. The Figgins contract is indeed a sunk cost, and its value has no bearing on what the greatest value of Figgins the player is. If the Mariners believe he can play his way into some value as a trade chip, then it may well make sense for them to play him. The amount that they’re paying him, however, has no bearing on what that value will be and needs to be eliminated from consideration in the decision-making process.
Torjazz - February 21, 2012
I strenuously state that your conclusion is wrong.
Matthew - February 21, 2012
incorrect
The intial cost on the books is a “commitment”, which is not a liability until such time as the liability falls due.
Henry H - February 22, 2012
Figgins isn't a sunk cost
But if he didn’t make $18 million the last two years this team wouldn’t be talking about hitting him in the lead off spot. If that doesn’t have something to do with sunk cost fallacy then nothing does.
njd.aitken - February 20, 2012
Huh?
What does what he made the last two years have to do with this situation? Figgins is being considered for a lead-off spot because he had success there in the past. Not to mention that they want to move Ichiro somewhere else in the lineup to increase flexibility.
ThundaPC - February 20, 2012
This is stupid
I like baseball
SmoakyCokey - February 20, 2012
Thanks for the comment.
Here’s some baseball for you
Matthew - February 20, 2012
Lookout Landing - Volcanoes, Logic, and Baseball
Cascadian Man - February 21, 2012
You forgot beer
and lunch
and Felix.
Felix gets his own category.
Matthew - February 21, 2012
But I would enjoy meeting him for at least two of the other categories.
abender20 - February 21, 2012
Volcanoes and logic?
Eyebrows - February 21, 2012 via mobile
Semantics are irrelevant
(Ignoring discounting for a moment…) it doesn’t matter whether we say we’ve spent $36m in sunk costs on Figgins but can possibly sell him for some value or if we say we will have to pay in the future unless we get salary absorbed.
Either way, the logic of sunk costs holds: we shouldn’t consider how much we signed him for in deciding whether or not to sell him. He has some current/future value (even if possibly negative…) to us, and we should only consider that against the value we could get for selling him (in terms of salary absorption, etc.). Here’s the only point someone’s trying to make when they say “sunk cost:” the $36m doesn’t enter into the cost/benefit calculation at all.
It’s still possible you can raise his value by playing him, “sunk cost” or not, but let’s not jump all over people making a perfectly valid point using economic logic that is mathematically equivalent to your own because you don’t like how they’ve defined terms.
expatbayern - February 21, 2012
Should have read this before writing my own statement.
Schuxu - February 21, 2012
"Definitions" and "semantics" aren't the same thing
Aaron Campeau - February 21, 2012
Isn't the sunk cost fallacy about making descissions independently from your sunk cost.
In Figgins case: The first 18 mio. are sunk cost the second 18 are not. So all the theory says is: Don’t factor in these first 18 when you decide whether to play him or kick him away. The second 18 have nothing to do with this theory (but a lot with the descission). I don’t really see how this theory comes into play in this situation?
Or maybe this is just what this whole post was about.
Schuxu - February 21, 2012
Exactly!
The theory doesn’t come into play, but many people have been treating it as if it does. See: http://www.lookoutlanding.com/2012/2/20/2813088/sunk-costs#92620152
Matthew - February 21, 2012
I would trade Chone Figgins for that banana and take on all of his salary.
Ride the Apocalypse - February 21, 2012
This is not that complicated
In determining whether or not something is a sunk cost, you have to think about the cost, not the value. The only time you consider the value is how it affects costs that have not yet been incurred. So all you need to know is: if Figgins’ cost is COMPLETELY independent on his future performance, it is sunk. Otherwise, it is not sunk.
The part of Figgins’ contract we have already paid is sunk, because it is obviously not recoverable conditional on Figgins’ future performance.
The part of Figgins’ contract we have not already paid is NOT sunk, because we might not have to pay it depending on whether we can offload his contract to another team. That, IN TURN, depends on his performance.
Therefore, part of the cost of Figgins’ contract is sunk and part is not sunk.
gogurt - February 21, 2012
Sorry
I just finished reading over everyone’s comments, and basically people have been making this same point over and over again. Sorry for the redundancy. I am a professional economist, it’s hard to suppress my inner douchebag sometimes.
gogurt - February 21, 2012
Isn't this the same way we would approach defining sunk costs for a lease?
When you sign an unbreakable lease on, say, your apartment, the total amount of the lease is sunk, regardless of future use since you are required to pay it under contract. If, however, during your lease you decide you can no longer afford it, sublet it to a friend for less than what you were paying, and move back home, sunk costs on the lease are now calculated as total minus friend’s rent payment. So, in essence wouldn’t Figgins’ contract indeed be a sunk cost since it’s binding and unbreakable (for this exercise at least); what they get back in trade would then determine to what extent that cost is?
ThomasG - February 21, 2012
Sunk cost to whom?
Independent of ownership, yes, it’s a sunk cost. But it may not end up being your sunk cost.
Matthew - February 21, 2012
To the Mariners. If the Mariners do absolutely nothing with Figgins or decide to start him at 3B for the remainder of his contract, the sunk cost to the Mariners is $36MM regardless since (in a simple scenario) they can't get out of paying that to him.
But, for example, if the Mariners were to trade Chone Figgins to the Spungos today for a bag of baseballs and agreed to chip in $10MM to offset a portion of Figgins’ remaining contract, Figgins’ sunk cost value to the Mariners would be $18MM (i.e. previous two years of salary) plus $10MM (less the value of the baseballs).
ThomasG - February 21, 2012
Yes
Matthew - February 21, 2012
I think that's where people are getting confused when they incorrectly call a player a sunk cost.
In the scenario above they’re assuming Figgins is a sunk cost because, whether the Mariners cut him or trade him or whatever, there will be a considerable loss. Ideally he’d be correctly labeled a toxic asset instead of a sunk cost but that’s a relatively new term that hasn’t really been adopted into common vernacular yet.
ThomasG - February 21, 2012
Thankfully Matthew didn't mention the term toxic asset anywhere.
abender20 - February 21, 2012
Thankfully I never implied he didn't.
Merely agreeing with his assessment.
ThomasG - February 21, 2012
So, I just looked up the definition of toxic asset
Investopedia
So, if Figgins is indeed a toxic asset, and therefore cannot be sold, that would make him a sunk cost, right?
Nick McD - February 21, 2012
There's still a possible secondary market for Figgins.
It’s not frozen. If that market became frozen (no team would trade for him at any cost) then yes, he’s a sunk cost to the M’s
Matthew - February 21, 2012
So Figgins, by definition, is not a toxic asset, right?
Nick McD - February 21, 2012
I'm not sure.
It’s not how I’ve interpreted the definition from other sources. I see it as the secondary market disappearing shouldn’t be a requirement of a toxic asset. It should be a condition of a toxic asset.
From the wiki definition
The last sentence is the exception that proves the rule to me. There is current no market for Figgins, but that market does still work. It is feasible that Figgins could be traded.
Matthew - February 21, 2012
fair enough
Nick McD - February 21, 2012
I don't think toxic assets and sunk costs are really the same thing
When your asset loses value from when you purchased it and maintains only a part of it’s previous value in exchange with a permanently reduced market, that’s a toxic asset. You’re pretty much guaranteed to lose money on it, but you can still get some of your money back.
When you have an asset that has no value left to you at all because it cannot be exchanged period, that’s a sunk cost. That’s the scenario where you just throw whatever you bought in the trash because it’s now worthless. You don’t throw a toxic asset in the trash, you hang onto it because even though it’s worth less than it was previously, it’s not completely worthless.
Figgins is less valuable on the field or in exchange than he was when we acquired him, he has less value but it remains to be determined if he has no value at all. This effectively makes him a toxic asset in the sense that he cannot provide a return equivalent to what was paid for him. But he is not a sunk cost because he may still have some amount of value. In order for Figgins to be a real sunk cost, imagine it this way:
Say we signed Figgins for 4 yrs. 36 million dollars. The next day, Selig issues a new rule that says it is now illegal to either trade or play or in any way utilize Figgins’s for a teams gain and sucks for you if you own a Figgins because you’re not getting compensated for it. In this case, we just spent 36 million over 4 years on something that has absolutely no value anymore and cannot be recouped in any way. This would be a sunk cost. This is the scenario where you might as well cut him because you can’t play him or trade him or even have him be that adorable midget who sells Dippin Dots. I don’t think this applies to Figgins because obviously there are scenarios where some of the investment in him can be recouped still. This is what we’re disputing with the sunk cost fallacy.
OlSalty - February 21, 2012
No, toxic assets and sunk costs are not the same thing.
And a sunk cost is not just something that you throw away. Say you find an oil field that has 1 million barrels of oil. At a price of $100/barrel, you are sitting on $100 million. You spend $25 million to build a well. Once you have the well built, it costs $50/barrell to get the oil out of the ground and bring it to market. That leaves you with a cool $25 million in profit.
Now, let’s say that as soon as your well is finished, the price of oil plummets to $60/barrell. Do you go through with pumping the oil? Of course, because the value of the oil is greater than the cost to produce it; you don’t factor in the cost of the well. That’s the definition of a sunk cost.
Nick McD - February 21, 2012
I'm pretty sure that's not a good example of a sunk cost at all
It’s a good example of losing money on an investment. But losing money on an investment is not the same as a sunk cost. At least not in the way people here have been applying it to Figgins. A sunk cost very clearly denotes worthlessness, not simple loss.
OlSalty - February 21, 2012
I thought this whole thread was about people using the term incorrectly?
Nick McD - February 21, 2012 via mobile
No.
In his example the sunk cost is building the well. It’s the part of the project that you can’t recover, so you don’t consider it when deciding whether or not to move forward.
Sunk cost does not mean “worthless”. The sunk cost is the portion you can’t recover no matter which strategy you pursue. That may mean you have a $5MM oil well for which you paid $25MM. That’s a $20MM sunk cost, but it’s not a worthless asset.
morrow - February 21, 2012
When using it in the sense of whether the total cost is sunk in Figgins' case, yes it does mean his value to us in the future would have to be "worthless" as well as the fact that the previous money spent on him was sunk
In order for the Figgins investment in it’s entirety to be a sunk cost, his future value would need to be unrecoverably worthless, with no possible future value capable of being extracted by playing him. That’s what I was trying to say is wrong when people use the term “Figgins is a sunk cost”.
OlSalty - February 21, 2012
But that's not right.
A sunk cost doesn’t mean the investment is worthless and needs to be thrown away. All that a sunk cost means is that you can’t take the value of that cost into account when making future decisions.
Nick McD - February 21, 2012 via mobile
I'm not saying that's what it means, I confused myself earlier and hit post. I'm saying that's how you'd have to view it for things that still have future obligated costs to be as a whole sunk costs by definition.
When we’re talking about whether Figgins as a whole is a sunk cost, past and future, you would have to view the future obligations owed to him as something you should not take into account because there is no chance of him having value or of recouping those expenditures. Since he still has future obligations owed to him, in order for him to be a totally sunk cost, the argument would have to be that you should not take the remaining cost of Figgins’ contract into consideration when deciding whether to play him because the entire investment is unrecoverable anyways and no value can be extracted from him either on the field or in trade. Which is not true.
OlSalty - February 21, 2012
What I'm saying is that the value Figgins brings back in a trade
is independent from what he is owed. If someone else thinks he’s worth $3 million for 2013, we’ll send $6 million with him. If someone thinks he’s worth $1 million, we’ll send $8 million with him. Either way, we’re out $9 million.
Nick McD - February 21, 2012 via mobile
Everybody is in agreement with that statement.
Matthew - February 21, 2012
So the $9 million in 2013 (and the $9 million in 2012) is a sunk cost, right?
Nick McD - February 21, 2012 via mobile
I need to work the subject on a whole further
but I think you are here leaving out a crucial step in the leap between those two statements that’s tripping me up.
Matthew - February 21, 2012
It's quite possible that I'm full of shit.
My econ degree has been gathering dust for almost seven years. Plus it says Wazzu on it.
Nick McD - February 21, 2012 via mobile
The "it's a sunk cost" arguments have been so far mostly been framed in a way
that I found focused on Figgins and in refuting tangential points that were never proposed. I need to think it over because I just realized I might have been neglecting something initially.
Matthew - February 21, 2012
Isn't the loss only
the cash sent to offset the contractual obligation picked up by the acquiring team?
And if his contract is sunk cost regardless of his value, doesn’t that make all guaranteed contracts, and most or all of the teams payroll sunk cost?
xmet - February 22, 2012
Yes, all guaranteed contracts are sunk costs.
The sunk cost fallacy here would be refusing to trade Figgins unless we can get value equal to what’s left on his contract.
Nick McD - February 22, 2012 via mobile
That may be true,
but the sunk cost fallacy that we most often see (regarding Figgins) is that we must play him since we spent so much money on him.
morrow - February 22, 2012
I should clarify
I’m not agreeing with the “sunk costers” in the other thread. I believe that the cost is sunk, but not that he should be jettisoned immediately. The decision to play Figgins should be solely about whether or not he creates more value (including what we can salvage from another team in 2013) than any other option, but not about the money committed to him.
Nick McD - February 22, 2012
Good point.
I don’t know if I’ve come out and said that either, but I completely agree.
I actually hope we keep him and he turns out to be a valuable and versatile backup. I don’t want his 2014 option to vest, though.
morrow - February 22, 2012
100% agreed on all counts.
I’m not as down on Figgins as most everyone else here. Probably because I didn’t have cable last year and didn’t get to watch a whole lot of games, and the magnitude of suckage was limited over the radio by Rick Rizz’s rose colored glasses.
Nick McD - February 22, 2012
I think I've reached this point as well.
I’m just trying to tweak a mathematical model to make it easily demonstrable
Matthew - February 22, 2012
Matthew has now shown me that you're correct
So my apologies for earlier, like Matthew pointed out I wasn’t factoring in the ability to generate income by playing and trading Seager equivalent to Figgins if their value on the field is equivalent. So you’re right, you should just play whoever you think is more valuable.
OlSalty - February 22, 2012
Err wait I didn't put that right
I see what you’re trying to say in that you wouldn’t have made the well if you knew the cost of oil was going to bottom out like that. But people are using the term sunk cost here to argue that Figgins has no potential value to be gained in the future and should just be cut instead of bat first in the lineup. This is the way the term is being applied for the sake of this discussion, that Figgins is of no worth and should just be “thrown out”.
It’s true that the costs already invested in Figgins are unrecoverable losses. Some of the Figgins contract is a sunk cost, the parts of it we already paid for and got nothing out of. But when people say “Figgins is a sunk cost” they’re not just talking about what has already been spent on him without returning value, they’re talking about him as a player then, now, and in the future so long as the Mariners retain him to argue that he shouldn’t be played, and that’s not accurate because he has potential future value that is not necessarily totally unrecoverable. So he’s not totally a sunk cost, 2010 and 2011 Figgins were costs that sucked for the money we paid for them and nothing can be done to recover that, but he himself for the purposes of being an investment the Mariners made is not a total sunk cost yet.
OlSalty - February 21, 2012
In that case,
this post is spot-on in that people are using the term incorrectly (I haven’t read the offending comments on the original post). For the record, my position is that yes, Figgins’ contract is a sunk cost, but that doesn’t necessarily mean he shouldn’t play.
Nick McD - February 21, 2012 via mobile
I think the bigger hurdle is this:
The return the Mariners demand for Figgins should have nothing to do with his cost. For example, the Mariners, if/when contemplating trade scenarios, should never say something like “We’re paying him $9 million, we need to get more back than this.”
Matthew - February 21, 2012
You should give a seminar to everybody putting their houses on the market in my area.
Seems like this is a foreign concept not just limited to baseball fans alone.
ThomasG - February 21, 2012
It's about context
To the Mariners organization — from Chuck Armstrong down — his salary isn’t a sunk cost. They could trade him, renegotiate, void the contract (unlikely), etc.
To the Mariners team — Eric Wedge and the 25 or so players in the dugout — making day-to-day or week-to-week decisions on the lineup, his salary is a sunk cost. He gets paid the same whether he’s the every day 3B hitting lead-off, a utility player playing 1/2 time, or the last guy off the bench. Fallacy is playing Figgins over Seager because Figgins is getting paid $9M and you want to “get” something for that $9M even though you think Seager gives the team a better chance of winning.
To the original post, it’s like eating that banana two weeks later after it’s rotten because you paid 19 cents for it and don’t want the money to go to waste.
AdamSt - February 21, 2012
Almost. That works if your two groups have no effect on each other.
The moment the M’s organization is dictating role and playing time to the Mariners team, in order to create value in Figgins to make him tradeable, then the context is rather different.
Chris_FB - February 21, 2012 via mobile
I think I liked this post more when I thought it was Jeff naming his fictional friend "Smeff"
seattlebruin - February 21, 2012
I just noticed the picture of Carlos Silva with the caption of "Actual sunk cost".
How was his situation different than Figgins?
morrow - February 21, 2012
Because the Mariners are not on the hook for any more money
Finally.
Nick McD - February 21, 2012 via mobile
His contract is over.
Matthew - February 21, 2012
Okay, I see.
It was the same, but now it’s off the books and so it’s different. Thanks.
morrow - February 22, 2012
He was part of a
sunk cost swap.
xmet - February 22, 2012
He is frowning
abender20 - February 22, 2012
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