The Idea of Sunk Cost and Letting Go

Sunk cost is a most important idea I learned in a Decision Analysis class. In “technical” terms, sunk costs are costs that had already been incurred that is irrecoverable.

Why is this so important?

Sunk cost is an indispensable idea that enables you to have rational thinking and to make rational decision, and rational thinking and rational decision are what you need to prevail in many areas in life, such as investing, making business decision, deciding the next move in relationship/career/life, etc.

In a practical example of whether to sell your car, you can:

  1. Compare current selling price with how much you paid for the car and think about the loss (the difference) if you sell the car now. If the loss is too big, you keep the car.
  2. Think about how much you gain by selling (maybe use that toward a more fuel-economical car) and/or the maintenance and insurance you DON’T have to pay later, which will lead to more saving. And if those gain and savings do not provide more value than not selling, you will keep the car.

Now I didn’t cover every aspects and parameters involved in the decision of car-selling in real-life, but you get the idea.
Which do you think is a rational decision?

In the 1st scenario, you let something that has already happened in the past to drive your decision.
In the 2nd scenario, you consider all future potentials and base you decision upon those.
Pretty obvious.

The price you paid for the car is no longer relevant. However, you can imagine how people will choose not to sell like in the 1st scenario in real life.

Quickly, we can translate the same idea into making decisions in a business project and a personal relationship setting.

Instead of deciding whether a project should be continued with focus on how much money and human resources had been invested, you need to focus on how much potential investment return if the project is to be finished, the probability of the project failing, and how much more cost will be incurred, etc. You do not focus on those “wasted” resources because they are already sunk cost.

Now in terms of personal relationship, instead of deciding if you should stay with somebody based on the amount of time and effort spent, you evaluate about the current trust/confidence/comfort level you have with this person (that is a result of past experience, but NOT the past experience), the potential amount of happiness/sadness, whether he/she can change bad habits or if you can endure them, and many many other aspects involved in a intimate relationship looking into the future.

Those are just some very generic examples. But to put in more generic term of how sunk cost assist you to be more rational is that “what happened has happened and you should not let yourself get dragged down by the past”. I’m am not urging you to be completely rational and throw away the past, but it’s age-old wisdom that you do not let the past becomes the burden of future, especially the mistakes and bad experience. This is the same idea as we tell each other to “let go”.

Look into the future and based your decisions on those visions, my friends.

To have all the details and technicality on the idea of sunk cost, visit here.

Originally posted 2007-09-10 23:29:07. Republished by Blog Post Promoter

Debt and Conspicuous Consumption Speak Fundamental Problem

2007111850020101.jpgDebt and conspicuous consumption are symptoms of a much fundamental problem.

The subprime crisis, consumer debt issue, and negative national saving rate don’t happen together out of sheer chance like giving birth to triplets. They demonstrate the change in people’s values and perception from past decades. What is the difference?

It is a fact that life can be a bitch and some are very unfortunate to be much handicapped to begin with. However, it is also a fact that they are the minority of the population who have no choice being in poverty. Here today, let’s focus on the majority of the population who has the luxury of the freedom to choose.

At the end of the day, people deep down know what they need to do for themselves regarding their finance, but somehow somewhere along the timeline, people stop admitting to reality and ignore what they know. They prefer to be denial, and may even do their best to stay in ignorance, so they can justify themselves. Ah, ignorance is a bliss… but not really. There is always a choice, and people choose to be ignorant so they can be superficially happy through materialism and instant gratification. They like taking the easy way out, though it is only temporary, but they don’t care if it’s only temporary.

Being in denial, people try to become something they are not. And whether they know it or not, that builds up a void within… you can think of it as a spiritual void or a feeling of emptiness. Call it what you want. As this void gets bigger, people try to fill it with external things, which are paid for with money or credits — money they don’t have. These external things provide instant gratification and the perfect noise to mask that void. As time goes on, they lose a great deal of responsibility, integrity, discipline, and compassion with such behaviors.

I don’t think people should blame credit cards. Credit cards are merely financial tools and dead object. Like subprime mortgage, like all other forms of intelligent(dumb)financing program. Like money. They are all dead objects. How can they be held accountable? Companies make them available, and people choose to use them.

I think life is structured a way that allows us to make many mistakes. We can make a lot of mistakes at different times, as long as we recover from each. And frankly, we all make mistakes in life. We need to do our best to stay aware and catch and correct mistakes as quickly as we can. I cannot fathom that it is one big mistake that brought everyone down to their knees. Humans are tough and adaptive creatures. The key lies in being aware and always learning — the opposite of being in denial and ignorant.

It only becomes the big issues today as people remain in denail and continuously make the same mistakes, until one day — WHAM!!! — they found out they are holding on to a thread hanging off a cliff. They tried to chase after the something that they vaguely see and believe that will bring happiness but won’t and now they need to catch themselves before they fall. They need to recover from their mistakes, and they will if they choose to.

Indeed, we need external things for survival and for pleasure. It’s a part of life. But when you look to ONLY externals for happiness, you are chasing after shadows.

I believe happiness happens when you look within yourself first. When I said to look within yourself, I mean to find the values in life that are important to you. You need to get to know yourself. Know what you want in life. To each person, there are many important values, so you must prioritize, and I dare claim that no one should have money and fame at the top of the list. With such a list, you shall know what is “enough” and hence, be able to distinguish between “wants” and “needs”. You can then simplify your life and not have excessive externals yet be content, though remember being content does not mean being satisfied and complacent.

Problem happens when people never stop to find out their values. Again, they try to become what they are not. I don’t believe it is entirely the people’s fault because of how they become conditioned the way their are — constantly being distracted by advertisements, bombarded with information, and conditioned about money/appearance/fame. As a result of those: They think they will be happy when others see them as rich. They think they will be happy when they have that next-best-thing. They think they will be happy when they beat their neighbors.

However, there comes a time for each of us to come to understand that such a culture doesn’t work and therefore, learn not to buy into such a culture. It is not easy, but it is what we need to do. This is where discipline comes into play, and where we take responsibility for ourselves.

So at the same time you are learning and reading about all those “methods” on how to get rid of debt or to build your wealth, why not take a pause to learn about yourself and get your values straightened out? Because if you don’t, your changes will likely be short-lived because your character has not changed.

You can shred your credit cards, but if you don’t fix the problem by fixing the fundamentals, the problem will come back as easily as it is to shred the credit cards.

Originally posted 2008-03-28 10:22:28. Republished by Blog Post Promoter

Wisdom Results Not in Process, It Results in Outcome

We humans tend to think of wisdom as a top-down procedure. A powerful mind gathers information, measures it against the lessons of accumulated experience, and makes a rational decision. But really, wisdom is not a process but an outcome; it’s the ability to live well, to anticipate and be prepared, to avoid disaster, to navigate troubles. It came through experience and pattern recognition or it can come through instinct and feedback loops, as it does with bees. Either way, it’s a process of trial and error, of learning from mistakes. One method emphasizes the individual’s role, while the other relies on genes and evolution. Our species tend to recognize only the former method, but nature seems to favor the latter.
Rowan Jacobsen

Originally posted 2011-04-26 16:48:56. Republished by Blog Post Promoter

Talking Ourselves into Depression – Doom, Gloom, and BOOM

Our thoughts create our reality. There should not be any doubt about that. We think, we translate that into words, and that in turn can influence others around us.

And if you have pay attention to the news lately, the thought of a up coming depression is almost unavoidable. It may indeed be true that the situation is as serious as it sounds, but the media is certainly not helping. It’s no doubt that they are driving more fear than necessary by selling all the drama. And they sell drama because it works… it may not be happy things, but people like it. Almost like we are letting ourselves be talked into a depression by ourselves.

This is another form of people taking things to the extreme. When will people stop buying into drama and see reality as it is and simply change with the change?

Originally posted 2008-11-16 23:15:47. Republished by Blog Post Promoter

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