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You know, in economics, why "past costs" shouldn't influence future decisions?
In economics, "sunk costs" refer to costs that have been incurred and cannot be recovered. This means that these costs should not be considered in future decisions. The opposite of sunk costs are future costs, which are future expenses that are avoided. When making business decisions, only future expectations should influence our choices. Although economists argue that past expenditures should not influence our future decisions, in daily life, people are often affected by sunk costs. For example, when repairing a vehicle or house, they often take into account previous expenditures.
Past mistakes are irrelevant and the costs that have been incurred have been incurred regardless of the decisions made.
According to traditional economics, only future costs are factors that need to be considered in rational decisions. This principle is called the "bygones principle", which states that for any moment, the best choice at the moment should depend only on the currently available alternatives. Therefore, even if the initial budget for a new factory is $100 million and the expected revenue is $120 million, after investing $30 million, if the revenue forecast drops to $65 million, a rational company should choose to abandon the project rather than invest another $7,000. Wan completed the same project. On the other hand, if the expected revenue drops to 75 million, then a rational actor should still continue with the project.
Although the concept of sunk costs is clear in theory, in reality, people often make irrational choices because of the money, time and energy they have invested. This behavior, known as the “sunk cost fallacy,” leads many people to persevere when the going gets tough, even though their resources may be lost. We fall into this trap when the costs of our investments make us reluctant to admit that previous expenditures were wasteful.
People are usually more inclined to continue investing after they have already invested money, energy or time, which is equivalent to "throwing bad money into good money".
For example, many people may be reluctant to let go of a failing relationship because they have "too much invested in it." Or, some people insist on continuing in the war, believing that too many lives have been spent and that defeat should not be declared. These phenomena are not entirely consistent with rational choice theory and are often considered to be erroneous manifestations of behavioral economics. Research shows that negative emotions have a significant impact on the sunk cost fallacy. Anxiety makes people more likely to continue investing after an investment fails.
There is also a phenomenon - plan persistence bias, which is a subtle cognitive bias that allows people to continue to choose the original plan even in the face of changing circumstances. For example, in the aerospace field, it is considered an important factor in accidents. Research has found that participants in many aviation accidents often fail to change their course of action immediately because they stick to their previous plans.
When making decisions, actors often overestimate their chances of success. This is partly because they insist too much on their own principles.
Why are we still affected by sunk costs even if we behave rationally? Psychological factors such as framing effects, excessive optimism bias, and perceptions of personal responsibility can cause investing individuals to ignore reality and continue to invest. Many times, people continue to make poor decisions because they are unwilling to admit to others that their investment failed.
Courage and endurance are certainly important factors for success, but when it comes to investment decisions, wise choices should be based on potential future returns and current realities, rather than sunk costs that can no longer be recovered. Have you ever been unwilling to let go because you have already paid, and finally realized that the real loss is actually in the potential opportunities in the future?
