Sunk Costs
One key to understanding how the past affects the present is the concept of 'sunk costs'. This refers to the tendency to allow past investments or expenditure to affect decisions in the present. Even though every decision has to be taken on the basis of the factors present in the situation right now, the pull of past events can be very strong.
We need, wherever possible, to see decisions in terms of future benefit rather than past losses or gains. But we are often more likely to choose alternatives that are in line with our past spending rather than changing direction, because we don't like the idea that past investment is 'wasted', and wish to redeem it. This can lead us into the trap of 'throwing good money after bad', or 'honouring' sunk costs.
What has been invested need not be financial, or even tangible. In fact, we may feel a far stronger 'pull' from emotional investmetns than financial ones. For example, we might wish to continue with a project because of the time we have put into it and the attention we have lavished upon it, even though it has become clear that the probability of success is far lower than we had thought. The problem is that we have 'put something of ourselves into it'; to give up on it now is to give up on a part of ourselves. Obviously, these feelings are a long way from objective decision making.
Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Wednesday, 25 November 2009
****Every decision has to be taken on the basis of the factors present in the situation right NOW
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sunk costs
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