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  January 20, 2017
Why We Make Bad Decisions...

 


Destiny is not a matter of chance, it is a matter of choice. It is not a thing to be waited for. It is a thing to be achieved.

                         ~William Jennings Bryan

"So what time did you finally end up getting home last night?" my wife asked me early Friday morning.

"Umm... I’m not sure... probably around 2am", I responded, still half-asleep.

"Why so late?" she continued her questioning, "when we talked around 10pm... you told me that you were almost done with your blog".

"Well... I was almost done at 10pm... then I re-read the blog before uploading it to the mail server and I just Step Backdidn’t like what I had written.

"The blog this week really sounded too ’preachy’ rather than ’here are some interesting ideas... I’ll let you draw your own conclusions’...

"...so I decided to delete most of what I had written and start over from a completely different perspective... I think it’s much better now", I concluded.

Probably in hindsight... I could have published the blog as it was first written. I’m fairly certain that only a very few people would have noticed and I wouldn’t have lost those several hours of sleep that evening.

I could have easily justified my decision by rationalizing that I had already invested several hours into the project and that by starting over, those hours would be lost forever.

However, this type of thinking is actually a fallacy.

Accountants know this concept as "Sunk Costs".

Sunk cost is when we make additional investment of time, money, and/or resources, reasoning that unless we invest more, all of our original investment will be lost.

That original investment causes us to "throw good money after bad".

In it’s logical form:

X has already been invested in project Y.
 
Z more investment would be needed to complete project Y otherwise X will be lost.

Therefore Z is justified.

We make our decision to keep going forward with additional investment not solely based on the future of that investment but rather based on what our investment in the past was.

We knowingly continue down the path in the wrong direction, because turning around and starting over is sometimes harder than continuing forward, despite the fact that we are completely aware that continuing in the wrong direction is leading us further away from our objective.

The very nature of most investments involve a certain amount of calculated risk.

The calculation of investment return should be based solely on future reward weighed against the risk of the investment.

The idea of somehow assessing a future return based on past investment is a fallacy.

The colossal casinos of Las Vegas are a testament to this type of fallacy.

Amateur gamblers have created elaborate betting systems that are typically predicated on what has happened in the past... knowing of course that the odds of winning and losing have no memory of the past.

The betting odds are solely determined by statistical probability on a future spin.

No matter how many times the roulette wheel has landed on a black number, the odds remain exactly the same for any future spin landing on black (roughly 47.4%).

The idea of sunk costs is not limited to financial investment.

I have known several people who have stayed in a bad relationship well after it was apparent that the relationship was essentially over.

Their rationalization in continuing the relationship is that they have already invested so much time and emotional energy in the past that they were determined to try everything to make the relationship work (rarely are their efforts rewarded)...

The same can be said for dead-end jobs or careers that have little or no future.

Instead of finding a new job or training for a new career, the employee will endure week after week of misery because they have invested so much in the past to be in the position they are today.

It is human nature to stay and watch the entire play even, even if the first act was horrible... we’ve already bought the tickets and since we’re already at the theater... why leave?

The food at the restaurant was mediocre (at best) yet we continue to eat it all since we already paid for the meal.

We fall into the sunk cost trap because we feel that we have already made an investment that will not be recouped... so we continue to pour more resources (time, mental health, stress, a nauseated stomach) into our failed venture.

Would we feel different about...

...breaking off the relationship if we had only been dating for 3-weeks rather than 3-years?...

...staying at our old dead-end job if a head-hunter called us to offer us a new position somewhere else?...

...if the tickets were given to us by a stranger on the street outside the theater for free?...

...if the "horrible" meal was prepared by our kids on back-to-school-night?...

Why is our decision to invest additional resources swayed by the events of the past, fears, gratuity, or how much we’ve already spent?

Several years ago I hired a consulting firm to help me design an e-commerce site to help sell OptiFuse products.

I ended up paying the consulting firm several thousands of dollars to study the existing market and recommend the best website design to effectively sell our products using the internet.

After approximately 6 months, they gave me their report telling me that I would need to spend a significant sum to actually build a website that would accomplish what I wanted to do.

The substantial money I paid for the consultant’s report was spent mutually exclusive on whether or not I went ahead with the project (ultimately I decided against the e-commerce type site).

Now there is a second... less obvious way of evaluating sunk costs when making a decision.

A friend gives you two tickets to a sold-out concert, but on the day of the show, another person offers you $500 for the pair. How much does it cost you to see the show? (you might say nothing since the tickets were a gift)...

...but now let’s turn that scenario around... a friend gifts you $500 and you take the money and buy concert tickets...

In both cases the cost of the tickets was $500... yet in the first case we are hesitant to place a cost of $500 on the tickets since they were given to us.

Each day we are charged with making decisions as to whether or not to make an investment (money, time, health, etc.)...

All investments have an associated cost, risk, and potential pay-off.

Past expenses are already spent and should have no place in making decisions for future investments...

...but we often let emotion stand in our way of making good decisions.

Thank you for your support of OptiFuse where we look forward to embracing the opportunities heading our way. 


Jim Kalb
President

Email -  jimk@optifuse.com
Website -
www.optifuse.com
Twitter - @OptiFuse

 
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