How do you make correct decisions when you have already invested time or money into something? We tend to be influenced by money or time already invested but really we should only think of the future.
- I just want to explain something called the sunk cost paradox to you now. It's something that might cause you to choose the wrong option when you're working on a problem. It tends to affect the really important questions of whether you should spend time or money on things. Here's an example. Imagine your company is working on developing a plane that's invisible to radar and you've spent 90 million dollars so far. You've just got 10 more million to go when a competitor suddenly brings out a plane that's better than yours, which means that yours will now probably only sell in much smaller quantities.
Would you spend the last 10 million to get your plane finished? Most people say they would. But now imagine you haven't spent anything yet and you have the option to spend 10 million dollars to develop a plane that's invisible to radar, but you know there is already a competitor out there who is better than the one that you could make. Would you do it? Most people say they wouldn't. And yet these two situations are the same. Spending 10 million dollars to get a plane that probably won't sell.
In theory, we shouldn't be influenced by past spending. We've just got the decision to make right now, whether to put money in or not. But it's so hard to get past the fact that we've already put money into it. And in real life, there are many, many situations like this. The time you've put into relationships, the time you've put into projects, the money you've put into advertising and marketing. If it's not working, you should cut your losses now. The correct decision-making process is to think only about going forward starting from now.
What's the cost of the time and the money that I need to put in and what's the benefit that I will get out? And therefore, should I do it or not? Whatever's happened in the past shouldn't come into it. Of course, if you've invested 90 million in the plane or the advertising campaign, then for only another 10 million you can get a plane worth 100 million. So, in that sense, the past investment makes a difference. But still the fact is you're comparing an investment going forward 10 million with the value of what you can get, a plane that has cost 100 million, but probably won't sell.
Similarly, if you're assessing a relationship, either work or personal, the only question is is the future of this relationship going to be a net positive? Of course, if there's a big past investment in the relationship, then it's more likely to be a net positive. But if something has changed and it's no longer a net positive, then you should really ignore the past and end it. A smaller example might be that you've spent three hours trying to fix your printer or get a spreadsheet working, and all you need is one more hour and you can probably get it working.
At what point do you cut your losses and throw it away, or buy a new printer, or start a new spreadsheet? You should always ignore the past and ask yourself, is an hour trying to fix this problem the best use of my time? So, for your current problem, are you being influenced by the past? Is there an element of cutting your losses or, rather, reluctance to cut your losses that is affecting your decision? What would you do if you had just encountered the problem right now with no history? Because whatever you would do in that situation, that is what you should do anyway.
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- Identifying the real problem
- Generating possible solutions
- Boosting your creativity
- Using your intuition and logic
- Selecting the best solution
- Considering implementation