Comfort 2 Growth

How do you decide to spend your time, money or other resources?

People tend to be loss averse. Meaning that we do not want to waste our resources, or feel like we are.

We often form emotional attachments to our decisions and commitments. For example, if you spend a significant amount of time on a project, an emotional attachment to this project will begin to form. This isn’t a bad thing, it just happens. We tend to form bonds with the things that we spend our resources on.

We feel compelled to recover our investment, even if it requires spending MORE money, time or happiness.

From an economists point of view, this emotional attachment to a past cost can be irrational, illogical and negatively affect our future. This has been coined as the Sunk Cost Fallacy.

The idea is that the past, or previous investment, should not be considered when making a decision. It is a sunk cost, it has already been incurred. Since it can not be recovered, it should not factor in to the decision.

There are only two things that should be considered. Current and future costs and benefits.

For example, Imagine you are half way through watching a movie and realize it is terrible.  If you force yourself to continue and finish the movie because you had already spent time/money on it, you would be committing the sunk cost fallacy. You could be investing your time on something better.

Trent at The Simple Dollar, explains it better than I do in this article.

This emotion based fallacy can often be seen in dysfunctional relationships. When an unhappy couple stays together longer because they’ve been together for so long already. They allow their fear of feeling like they’ve waste their time to make them waste even more time.

Moral of this story: Make now-based decisions. Ask yourself: Is this the best decision to make now? Will the next course of action or investment required worth the risk and subsequent benefit?