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

Read Financial Materials with Skeptical Minds

I came across the MSN article today — Foreclosure ‘crisis’ is overblown — amidst all the doom-and-gloom financial news.

Excerpt with the main points to save you some reading time:

Though the national rate of foreclosure increased by a whopping 79% between December 2006 and December 2007, the rate was still only 1.033%. Because about 30% of all homes are owned mortgage-free, this means that for all the noise about a crisis, only seven-tenths of 1% of all homes were in foreclosure.

In the top 100 housing markets, the average foreclosure rate was somewhat higher — 1.38% — and it was up 78% over the previous year. But if you rank-ordered the list of the top 100 areas, only 34 had foreclosure rates above the group average. Fifty-one areas had rates of 1% or less.

Foreclosure rates actually fell in 14 of the 100 areas. More important, many of the areas with the highest increases in foreclosure rates were rising off rates that were tiny. The Bethesda, Md., area, to offer the most extreme case, saw foreclosures rise 1,288% — to a rate of 0.682%…

Does this mean we can stop worrying and planning and saving? No, it does not mean that we can overlook the entire real estate ordeal and what’s really happening. However, I think this demonstrate that we need to be skeptical and understand the bias of the authors of the materials we read, despite whatever useful information exist in them. Further more, we must understand the possibility of some financial writers/analysts who exaggerate and write with the agenda to destory/hike a stock for their affiliated short/long position.

This is definitely an emotional time as people’s livelihood may be on the line as the market rises and falls like roller coaster these days. Yet, it remains important to not get carried away by our own emotions and thoughts. Don’t just take other people’s words for granted. Go find out on your own. Keep reading. Keep learning.

Since I said what I did, shall I even trust the article? I’m stumped.

Originally posted 2008-04-01 23:49:14. Republished by Blog Post Promoter

No Need For Financially Aware Consumers

Between the housing slump and the effect of globalization, U.S. economy is highly dependent and driven by consumer spending based on data from the first half of the year. Why did I bring this up? We people who blog about personal finance have often mention the need to teach financial awareness. This is especially true after looking at the lowest American savings rate in ages. People should educate themselves about personal finance to be financially ready for the future, to be able to take care of the inevitable parts of life concerning personal finance…

But then, I think those business people (I’ll call them “the man” from here) don’t want people to be so financially aware…

“The man” don’t want us to understand to figure out lesser deals that means bigger profit margin for them.
“The man” don’t want us to be frugal.
“The man” don’t want us to have budgets.
“The man” want us to put all our money into their pockets!

I know. I know. It’s a bit “conspiracy-theory-ish”, but after all, the economy is ESPECIALLY depending on consumers’ spending these days.

Just a thought.

Originally posted 2007-06-29 00:47:00. Republished by Blog Post Promoter

How to Be Awesomely Unsuccessful

Yep, you heard me right. I am feeling pretty devilish these days. So today, I tell you — Do the following if you want to be adroitly unsuccessful, disgracefully evil, or famously infamous.

Pay no Attention to Anything
This world sucks, and everyone’s going to die anyways. Even the earth may explode, or the sun will die eventually. Why should you give a damn?

Think Only of Yourself and Your Own Desires
Galileo was wrong. You are the center of the universe.

You Know Everything
Albert Einstein’s got nu’ting on you.

Listen Naught
“What? What’d you say? And don’t answer cuz I don’t really give a crap and I only hear what I want to hear anyways.”

Insult Whoever Crosses Your Path
Use your best rhetoric to defame and criticize. Lift yourself up by stepping on others. Easiest way to get to the top. Oh, who needs friends?

Blame, Blame, Blame
It’s never your fault, whatever happened. It’s always someone else, something else that caused the problem cuz they are all stupid compared to you.

Be Intractable
Change is for losers, like the dude who writes at Piggy’s Blog. You are just fine the way you are. No matter how unhealthy, how irresponsible, how angry, how hateful you maybe. You are just being your unsuccessful self. Be like that until you die.

Be Dishonest
Lie your way through any situation. Make promsies that you will never fulfill. Never do what you say. Yay.

Nothing is Possible
Quit at the first sign of failure. Give others no chance to call you out. Actually, don’t bother trying because at the end of the day, it requires too much time, effort, money, and discipline.

Hate
Nothing motivates like hate does.

Complain
Best way to solve a problem – complain until someone fixes it. Even if no one does, ‘es still da best kind of therapy.

Ignore any Problems
If there’s a problem, sweep it under the rug and it’s gone!.

Use not Your Brain but Violence
Trust your gut. If you feel like giving somone a black eye, go right ahead. If you think your kid needs a good thrashing cuz they are too annoying, grab the metal folded-chair and whack away. Show no signs of mercy or kindness, it will only hinder your journey to unsuccessfulness. Nothing solves problems like violence.

Kick ’em When They’re Down
What can be more joyful than making other miserable and being the audience. Prepare some pop-corns. Get the honey-glazed ones, and save some for me. Yum!

Never Exercise
Doctors and technology can always fix me up. If nothing, there’s still cosmetic surgery. Eh, worst case, I will just die. We all do anyways.

Well, that was fun, and I wish you best of luck. Work at it hard enough, and you may just achieve the rank of satan-hood!

Feel free to add to the list through comments.

Originally posted 2008-08-12 00:39:41. Republished by Blog Post Promoter

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