HVAC Cost and the Sunk Cost Fallacy

Have you ever heard of the sunk cost fallacy? It's a principle economists know well, but one many regular folks haven't heard about. In business, sunk costs refers to costs you've already paid for a necessary service. For example, the money you spent to buy your HVAC system is a sunk cost. That initial HVAC cost should be a consideration when deciding on how to repair or replace a broken air conditioner, but overvaluing it can lead to bad decisions.

What is the Sunk Cost Fallacy?

You buy tickets to a concert. On the day of the concert, you had a terrible day at work, and you have a crushing migraine. The last thing you want to do is go to a concert. But, you already paid for your tickets, so you make yourself go, because you don't want to "waste" that money.

That money's already wasted. It's gone, you bought the tickets. Going to the concert isn't going to make that money "worth it" or put it back in your pocket. You're out that money whether you attend or not. So, you get to the concert, with your migraine, and come back more miserable than you did before. But the money wasn't "wasted", so...good job I guess.

HVAC Cost is Not a Forever Investment

With a few obvious caveats aside, whatever you paid for your HVAC system is money you probably aren't going to get back. That money isn't an investment. It's not going to pay a dividend. It's money you spent to control your interior air temperature. Which means that no matter how much you spent way back when, you must not overweight that HVAC cost when considering repair or replacement right now.

Let's say you spent $5000 to purchase an air conditioner and have it installed. That air conditioner runs great for a while. Probably around year 6 or 7, something goes wrong. You have a tech come out, he identifies the problem, and fixes it. The warranty covers the parts, so you're only out for labor. Still not free, but much cheaper than buying and installing a whole new system.

However, there comes a point at which that math starts to go the other way. When your warranty is up, and age is wearing on your system, that's when you need to look at replacing it. Over a long enough time, regular repairs and part replacement can cost you and arm and a leg.

"But!" you say, "I paid $5000 for this system! If I don't get it repaired, that money is wasted!"

That's the sunk cost fallacy in action. That money is already gone. The question before you is: Will the repair I pay for today justify its expense?

Replacement is Not Defeat

Even the absolute best machine will break down eventually due to wear and tear. No matter how well crafted your air conditioner or furnace, breakdown is inevitable. As noted earlier, a simple breakdown with a simple fix may be an HVAC cost well worth absorbing. But as those breakdowns get more severe with each intervening year, replacement becomes the only solution that makes sense.

But I Spent $5,000 10 Years Ago!

And you enjoyed years of air comfort. To make the right financial decision today, you must ignore sunk costs when choosing between a repair or a new unit. Instead, make a value judgment between the price of a new HVAC system, whatever it is, and the repair cost. If it's a costly repair, the tech anticipates there will be more like it in the future, and you can find a new unit for not much more...there is an obvious answer. The better value is the solution that costs you less over the long term.

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