THE PRINCIPLES OF "SUNK COST" AND "LOSS BIAS"
EVERYTHING THAT HAS HAPPENED NO LONGER EXISTS
Theme: People misuse the past, past "losses", and avoiding losses such that they create needless stress and body damage and such that they make often poor decisions. This also keeps them stuck in beliefs that suck up their lives and their time.
DOES THE PAST STILL EXIST?
In upper division Management Accounting (where you are to make management decisions based on numbers and facts and logic), as their instructor, I started all these advanced, smart students with a couple of simple problems where they had to make a choice between two alternatives. Most picked the wrong one.
What was the error in their thinking?
Most of them included in their comparison between the two choices something negative that had happened in the past.
However, the value of something negative that has happened is zero, in terms of now and the future. Yes, there may be regret or sorrow about it, but that is something we've added as a negative meaning for us.
AVOIDING LOSSES, UNDULY
A prominent psychologist won the Nobel Prize In Economics (yes, economics!) when he proved that investors make many of their decisions with irrational bias and assumptions. To make a long story short, investors place a larger value on "not losing" than they do on a "gain". (Detailed coverage in Wikipedia: Loss Aversion.)
It seems that investors would sell the stocks that had gains in them rather than sell the stocks that had equivalent losses in them, even when the stock with the gain had better prospects for the future!.
They valued losses sometimes at double the gains!
Might this occur in life in general?
It turns out for the students and for the investors (and, perhaps, for all personal decisions), all that matters is now and forward into the future. The past is irrelevant, gone, no longer in existence. I cannot add anything to either alternative I am choosing between. It is only the future that counts.
SIMPLE NUMERICAL EXAMPLE
The easiest example might be: I have two stocks
One I bought at $20 more per share than the current price.
The other I bought at $20 less per share than the current price.
If prospects for the future are the same for both stocks, which one should I sell?
Though people will most often choose to sell the one with the gain, it's outcome would be to get the price of the stock minus the taxes that have to be paid on the gain, say $5. Selling the other stock however yields me the price of the stock plus the loss will allow me to deduct from my capital gains, so that I get an additional $5 from the IRS. One cost $5 in taxes, the other gets me back $5. So selling the stock with the loss is $10 better as a choice!
AND WE DO THE SAME TO OURSELVES PERSONALLY!
We will gyp ourselves in a similar manner with personal choices.
Say, a person has been a friend for years, but has taken to mistreating you. You do what you can to repair this valued long term relationship, but it seems that it cannot be repaired.
Some people would hold on "because we have been friends for so long" - but they fail to see that it is only the future which will affect benefits to you, with the past having no "present value" at all. The situation is only negative for the future and it is something we would not rationally choose!!!!!! (The past does not exist, so the only thing that does exist with regard to the past is the meaning we add to it, which is fine but is not relevant to your decision. That meaning is strictly a "mental construct" which you choose to make.)
Similar decisions: I've been in this job so long... But I married him for better or for worse, even if he is abusive... See further down on the page some analogies and metaphors to the sunk cost idea.
LOSS BIAS
While not exactly a matched pair, sunk cost and "loss bias" will often have the same damaging effect.
Psychologists often will say that the main function of the body/mind is to keep us alive (survival) and to do that the body/mind had to be extremely good at spotting threats/dangers - so it is biased towards keeping you alive but not towards making you happy. Yes, it'll reward you for doing things that cause survival and passing on of the genes, but that is not it's main purpose.
However, the truth is that we do lose some of our gains and we do make mistakes when we do not know yet how not to make them, but with proper perspective and understanding we will not get stuck in them being negatives, faults, nor threats. Once we learn this and get a more mature view of things, we can drop those beliefs that keep us stuck in fear and criticism of ourselves. (A perspective piece to read and understand: The Mountain I Have Versus What I Am Missing - An Esssential, Essential Life View - Based On Reality! - put so-called "losses" into perspective, too.)
The bottom line is that we spend so much of our time trying to avoid losses that we fail to fully live our lives AND we trigger our fear response in a chronically continuing unhappiness.
Notice that "avoiding losses" is involved in always trying not to look bad (trying to look good), guilt and shame, self criticism, and the like. Those are all control mechanisms we often misuse to get ourselves to avoid losses. They are all made up in the mind and misused and abused compared to their actual orginal function in Caveman days.
SOME ANALOGIES AND METAPHORS
If an antique you loved and was of incredible value before it is totally smashed and irredeemable, would you keep it because you enjoyed it for so many years and because it had value to you over the years and served you well?
If you had a great relationship and were enthusiastic about it for one and a half years, and your spouse became verbally abusive and was resentful of you and would not change, would you stay in the relationships (even if you would "look bad" to others for not being successful in relationships)?
If you had a car for 15 years and it was becoming very unreliable and dangerous to drive, would you keep it, as you have great memories of driving it and how pretty it was when you bought it?
One of my cardinal values is loyalty, so I'll be loyal even if it really hurts me. Does this make since?
(The answer is, of course, no to all of these, but lots of us humans continue to make such thinking errors.)
