Sunk Cost Fallacy - when is it time to give up?

[ATex7239]

The sunk cost fallacy is the tendency to follow through with something that we’ve already invested heavily in (be it time, money, effort, or emotional energy), even when giving up is clearly a better idea.

Recent Warren Buffet post got me thinking about something. My daughter‘s high mileage Hyundai has needed a few repairs over the years. Nothing major, but as a broke college student to her even a couple hundred dollars here and there seems massive. She asked me if it was time to get rid of her vehicle after some repairs a while back and I said no not yet. She asked what my criteria was and I said a few things 1) it is so much money that the price and effort far exceed the unusable life left of the vehicle - engine, transmission, suspension, etc. 2) it’s breaking so often that it causes a hindrance to your life and ability to work and/or go to school. 3) you have the money and you’re just ready for something new.

Sometimes it’s hard to know when to pull the plug, but I think it’s important not to become emotionally attached to objects. I told her I would let her know when I thought it was time. But we aren’t there yet. What is your criteria for pulling the plug on an old beater?

 

[OVERKILL]

The sunk cost fallacy is the tendency to follow through with something that we’ve already invested heavily in (be it time, money, effort, or emotional energy), even when giving up is clearly a better idea.

Recent Warren Buffet post got me thinking about something. My daughter‘s high mileage Hyundai has needed a few repairs over the years. Nothing major, but as a broke college student to her even a couple hundred dollars here and there seems massive. She asked me if it was time to get rid of her vehicle after some repairs a while back and I said no not yet. She asked what my criteria was and I said a few things 1) it is so much money that the price and effort far exceed the unusable life left of the vehicle - engine, transmission, suspension, etc. 2) it’s breaking so often that it causes a hindrance to your life and ability to work and/or go to school. 3) you have the money and you’re just ready for something new.

Sometimes it’s hard to know when to pull the plug, but I think it’s important not to become emotionally attached to objects. I told her I would let her know when I thought it was time. But we aren’t there yet. What is your criteria for pulling the plug on an old beater?

When you can't trust it anymore.

That's where we ended up with my parent's 2000 Expedition. You couldn't kill the power train (5.4L 2V with a 4R100 behind it), but it was getting taken out of service by other things pretty regularly at 24 years old and 330 or so thousand kilometers.

 

[ATex7239]

When you can't trust it anymore.

That's where we ended up with my parent's 2000 Expedition. You couldn't kill the power train (5.4L 2V with a 4R100 behind it), but it was getting taken out of service by other things pretty regularly at 24 years old and 330 or so thousand kilometers.

A brand new vehicle might fall into that description lol

 

[slacktide_bitog]

Subarus are a great application of this

If I had to actually drop the engine and replace the head gaskets, it would've been in the junkyard years ago, but head gasket sealers actually make them worth keeping

Being able to work on the car yourself vs having a shop do it also changes the equation

 

[JunkdrawerDog]

Mine are basically the same as yours. I place a high priority on your item number 2. I dislike being inconvenienced by my wheels. I've also been guilty of item 3.

 

[OVERKILL]

A brand new vehicle might fall into that description lol

Yep, we've got an GM EV going through that in the EV forum right now. Been in the shop for 48 days.

 

[The Critic]

When the cost of a repair event exceeds the ACV or....if the total spent over 12 months exceeds the cost of payments for the replacement vehicle?

 

[fantastic]

What the end of the road for a vehicle is going to be different from person to person. Often people justify buying the next vehicle that ends up costing more. You trade up lower costs, lower reliability for higher costs, higher reliability.

This will vary depending on resources, climate, condition, personal priorities etc.

I think a brand new vehicle purchase for just about any model should give 150k of relatively reliable service.

If one doesn't like tire rotations, regular maintenance, etc it'll be a hard road for car ownership. It does take a certain type to make older equipment work. Normally a good idea to have two vehicles if going the cheaper route.

I had to tell my brother to dump his Dodge Ram (remember those) b/c it had over 200k and he was replacing heads on it while the overall truck wasn't worth it...rust etc started taking grip. Think he said Transmission problems as well. He had a real desire to see that truck through but I had to give him my 2 cents for another aspect.

Like previously mentioned it all depends on the vehicle mainly. I had my old 95 F250 transmission replaced at 225k but got around 55k out of it before my financial prospects changed and I was able to buy the F350 for $17k and 75k miles. It's not easy finding good old used vehicles that are 10 years or older that can still get you around for some more time.

I'm not anti new and I've convinced myself there are plenty of good used vehicles on the market that aren't that old <5 yrs old or so that can be a decent buy. The newest vehicle I ever bought was a 1999 GMC Envoy in 2003. Put 65k on it and made a dumb mistake of trading it on a Mustang. Young at the time.

Most early years were 200k buckets I had no business buying so yes I've owned at least 35+ vehicles in my driving years. I've settled way down since I've reached a point that I can buy older fairly reliable vehicles that I can keep on the road for several more years. I've had the truck for 6 yrs so far and have no intentions of selling it. Cost to replace would be absurd.

Toyota and Honda seem to still be available used that might help in the reliability. You'll pay more for those nameplates though.

I know you all know all of this but I like to write things out to convey ideas that are commonly available to us all.

If one were to buy a decent priced automobile and intend to keep it for 150k or longer and decent paying job I'd say it could work out.


Side rant: Buffet isn't an idiot but listening to someone preach about being frugal while flying in a jet plane is kind of not on the same level. He certainly could be giving us worse advice I suppose.

 

[ATex7239]

When the cost of a repair event exceeds the ACV or....if the total spent over 12 months exceeds the cost of payments for the replacement vehicle?

I don’t always agree with this one. If that was the case we might have gotten rid of it when it needed tires, brakes, and rotors within a short period of time. If we took that money and bought something else, there’s no guarantee the other vehicle wouldn’t have needed things eventually too. Since she doesn’t have the money saved and doesn’t want to take on car payments/debt yet she wouldn’t be able to upgrade in vehicle. So she’d just be trading one beater’s problems for another beater’s problems in all likelihood .

 

[fantastic]

I don’t always agree with this one. If that was the case we might have gotten rid of it when it needed tires, brakes, and rotors within a short period of time. If we took that money and bought something else, there’s no guarantee the other vehicle wouldn’t have needed things eventually too. Since she doesn’t have the money saved and doesn’t want to take on car payments/debt yet she wouldn’t be able to upgrade in vehicle. So she’d just be trading one beater’s problems for another beater’s problems in all likelihood .

Exactly
What the selling price is for a vehicle is irrelevant for my desire to fix or maintain a vehicle. I think this might be another justification for buying something else. What if the value of that next vehicle plummets? Viscous cycle

 

[ATex7239]

Exactly
What the selling price is for a vehicle is irrelevant for my desire to fix or maintain a vehicle. I think this might be another justification for buying something else. What if the value of that next vehicle plummets? Viscous cycle

Yeah. Ramsey talks about this. I think this is one of those things that he’s mostly wrong on. He’ll say you shouldn’t spend $800 repairing $1000 beater. You should sell it and get something else. But no debt, right. Ok, so you sell it for ~$500 add the $800-1000 and now you have a ~$1500 beater probably not worth a crap either. Because the guy selling the car you just got also listens to Ramsey and sold his problem car to someone else too.

 

[The Critic]

I don’t always agree with this one. If that was the case we might have gotten rid of it when it needed tires, brakes, and rotors within a short period of time. If we took that money and bought something else, there’s no guarantee the other vehicle wouldn’t have needed things eventually too. Since she doesn’t have the money saved and doesn’t want to take on car payments/debt yet she wouldn’t be able to upgrade in vehicle. So she’d just be trading one beater’s problems for another beater’s problems in all likelihood .

Both are valid points. The issue with spending more than the ACV of the vehicle is if the vehicle gets totaled in an accident, you're going only get to receive fair market value for the vehicle.

 

[JeffKeryk]

Is the vehicle really repairable given the current issue? Does the vehicle have resale value? Do you like the vehicle?
After this repair, does it need 4 tires, brakes and maybe more?

Do the arithmetic. I like to keep 'em alive, but there is time to cut bait and run.
In business we are taught that the sunk cost cannot be a major factor in management because that money is gone. If a better option comes along, don't fall into the sunken cost trap.

 

[The_Jeff]

Presume it relates to this thread and the horse truck?

Happy 5000th post, BTW.

Having read the other thread, you have very perverse incentives in place by having her pay repairs while her parents pay for new cars. It's a capital vs running costs accounting thing. Many fall into this trap-- you'll see schools rent trailers for classrooms when building new ones make more sense, but would require a bond/ taxpayer approval.

The answers about reliability are on the money-- a car that needs a $200 window regulator is more reliable than a car that needs a $200 starter in the middle of a rainy night. "Reliable" meaning one can rely on it to get from A to B. To me, a car gets more reliable when its fleet brethren get some mileage, and mechanics unlock the secrets to "what will break first/next" through experience, and you can preemptively watch for symptoms to correct before getting stranded. You can get this by buying something new with a decade-old powertrain and four-year-old body style, or by buying multiple copies of the same car you've already worked on and gained experience on. I for example have had 20-ish Saturns, five 2nd gen Prii, six Camrys, etc.

The best engineered cars have conservative designs and fail-safes to get you home, even if they wind up in the shop an average amount of time. Just as an example, they say Chevies run poorly longer than most other cars run, period. Not endorsing Chevy but would you rather have a car that needs two $300 repairs in a year that can be done by the corner mechanic or a high strung import that needs one repair a year but it's $2000? The answer is not the same for everyone because that extra day of service may be important to someone.

 

[carviewsonic]

When it needs repairs which will cost more than the vehicle is worth (after the repairs are done), it's time to sell and move on.
If repair cost vs market value is a wash, but you know the rest of the vehicle is in good condition and you still like driving it, then the cost might be worth it.
Old cars can nickel and dime, but usually over months and years, not all at once. If you have the patience for those smaller types of repairs, you can usually get many additional years of service vs getting rid of it after the first couple of annoying repairs.

 

[fdcg27]

1) it is so much money that the price and effort far exceed the unusable life left of the vehicle - engine, transmission, suspension, etc. 2) it’s breaking so often that it causes a hindrance to your life and ability to work and/or go to school. 3) you have the money and you’re just ready for something new.

This makes perfect sense.
As long as a vehicle can be kept on the road at reasonable cost and remains reliable there is no rational reason to retire it.
In the case of your third criterion if you can afford something new and are ready to move on then why not?

 

[TomYoung]

When the cost of a repair event exceeds the ACV or....if the total spent over 12 months exceeds the cost of payments for the replacement vehicle?

These ideas are common, but fundamentally insufficient and incorrect. If you want to justify on economic grounds the cost of a repair, you need to weigh the cost of the repair, plus whatever the value of the car in its unrepaired condition against the future utility you will receive from the car once repaired. You can compare that number against the cost of a running car that will deliver the same utility of your repaired car, while also adding some value for uncertainty based on your knowledge of the car you already own against a lack of knowledge on the like used car you are buying. You can use similar logic against a better, newer, but still used car or even against a new car. Add in time value of money and insurance as other considerations. This gets very hard, and most people make their decisions with a lack of knowledge and a healthy dose of uncertainty. But there is a magic rule, which is that it is usually better to fix what you have, and usually better to stick with an old car rather than moving to a newer one. The cash value of a car makes little difference. Economics favors used cars.

 

[ATex7239]

Presume it relates to this thread and the horse truck?

Not what I was thinking about. Horse truck thread is about wants vs needs. This is a horse of a different color…

Happy 5000th post, BTW.

Thanks. I hadn’t even noticed.

Having read the other thread, you have very perverse incentives in place by having her pay repairs while her parents pay for new cars. It's a capital vs running costs accounting thing. Many fall into this trap-- you'll see schools rent trailers for classrooms when building new ones make more sense, but would require a bond/ taxpayer approval.

The answers about reliability are on the money-- a car that needs a $200 window regulator is more reliable than a car that needs a $200 starter in the middle of a rainy night. "Reliable" meaning one can rely on it to get from A to B. To me, a car gets more reliable when its fleet brethren get some mileage, and mechanics unlock the secrets to "what will break first/next" through experience, and you can preemptively watch for symptoms to correct before getting stranded. You can get this by buying something new with a decade-old powertrain and four-year-old body style, or by buying multiple copies of the same car you've already worked on and gained experience on. I for example have had 20-ish Saturns, five 2nd gen Prii, six Camrys, etc.

The best engineered cars have conservative designs and fail-safes to get you home, even if they wind up in the shop an average amount of time. Just as an example, they say Chevies run poorly longer than most other cars run, period. Not endorsing Chevy but would you rather have a car that needs two $300 repairs in a year that can be done by the corner mechanic or a high strung import that needs one repair a year but it's $2000? The answer is not the same for everyone because that extra day of service may be important to someone.

My daughter’s little economy car suits her just fine for now. It sees around 5,000 miles annually and provides basic transportation. No payments, cheap on insurance, ~35 mpg and relatively reliable. Just what a college student living at home needs.

 

[The_Jeff]

... And people assume that comparable used cars are in 100% good condition.

That's a BIG assumption.

When you want to commit money to something, you make assumptions, you have to. But you should know the scope of these assumptions and the problems that arise from being dishonest with yourself about them.

 

[SC Maintenance]

The Sunk Cost fallacy is the fallacy part. Every calculation is going forward. What you spent yesterday is water under the bridge so to speak.

I think a big factor is how much you can do yourself vs pay someone else. At that point its not just the money but the huge inconvenience of always having to take it for repair, vs just working on it occasionally yourself.

My big issue is people take "current value" into consideration. If I have to put a $3000 something into a car thats only then worth $3000, is irrelevant. How much more use am I likely to get out of said car. If I can get greater than $3000 in use - which isn't many payments, then its worth it to me.

The other key to not getting Nickle and dimed is to not let maintenance get ahead of you.