Throwing Good Money After Bad
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?
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
I agree. You shouldn’t let a sunk cost come into play with decision making. However if you give up on a project because you think it is a waste of time or resources you stand the chance of being labeled a quitter, or someone who fails to close. Sometimes it is good to see a project through to the end even though you think it will not be successful. It can be a good learning experience and show others that you are committed to achieving a goal.
@Allen Taylor Thank you.
@Joel I guess the real question then would be is the experience gained worth the continued investment?
Quitting while your a head is the same as quitting before you are behind.
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