Free myself? What fallacies? Am I being fooled? Am I making poor decisions? It’s finally time to answer these questions and reveal what causes us to make lousy decisions. Then, free yourself from the past and move forward with a clear vision.
There’s simple math behind this. Just switch your brain to “LOGICAL” mode, right now, so you may see past the misleading emotional distractions that are caused by deceptions in nature…the fallacies.
We all experience adverse outcomes that we can’t control, in business, and in our personal lives. They just happen. The calculations were correct. And we assessed the risk and mitigated all possibilities to ensure a positive outcome. Failure. The outcome was unanticipated and we’re now worse-off than before those decisions were made.
The stock went down when it should have gone up. Then the expected profits became losses due to changes in the market or economy. So now your 401K is worth $14,264.33 less than it was before you made investment change decisions. Example after example, we’ve all experienced similar outcomes at some point.
Your net worth TODAY
There is one simple concept I wish to convey. Sunk cost. This is the official economics term which means the amount already paid which cannot be recovered. The value of your item or initiative has diminished after being affected by the negative outcome…It’s reduced. If you take a snapshot of your entire situation at this very moment, it has a specific value. Your net worth, for example, has a number. Regardless of your gains and losses, that number exists, even if you don’t know how to calculate it. This is the state you are in today, regardless of positive outcomes or negative outcomes.
Now that you understand the value of your situation today, regardless of yesterdays losses, let go of the past. You can’t change it. You can’t affect it in any way. So let go of it. Cry if you need to, but get it out of your system. Now move on. If you spend one more second thinking about what you can do to change that outcome it will be a complete waste of your time, so don’t do it. Unless you made an actual mistake, which you must learn from, there is nothing you can gain from thinking about it. Sometimes, loss just happens.
I’m going to explain why making fresh new calculated decisions moving forward is the best approach. There are fallacies…deceptions that exist in nature which cause irrational decision-making after experiencing adverse outcomes. Please allow me to reveal these to you right now so you can start calculating your decisions based on actual mathematics.
The fallacies regarding loss
There are two primary fallacies regarding loss.
Sunk cost fallacy
There is a term used in economics called “loss aversion.” It refers to the fact that people are affected emotionally much more by loss than by gains. Losing $100 has a much stronger impact on us than gaining $100 will. This emotional impact causes irrational decision-making. The thought-process behind this impact is based on a fallacy…the sunk cost fallacy.
The sunk cost fallacy is a deception that tells us to move forward with a bad decision if much has been invested into it. Time, resources, effort, and of course money, which have been invested in the past, causes us to believe we must stay the course, even if it is a bad idea.
Once your initiative has been determined to be a bad idea, stop the initiative right now and forget about what has already been invested. It’s gone. It was in the past and you can’t change the past. Take a snapshot of your current situation, as stated above. This is where you are today. Now, take yourself back to the state-of-mind you were in before you started your initiative…before you made those initial decisions. Would you have chosen a bad idea? Of course not. So reset, and make new decisions based on new research and calculations.
Four simple examples of bad decisions after experiencing adverse outcomes:
You purchased a pie but were unable to eat it. Now it’s been in the refrigerator for over a week. It still looks good, but it’s about to expire. The sunk cost fallacy will tell you to eat the entire pie, before it expires. Now, take yourself back to the day you purchased the pie. If you had the time back then, would you have eaten the entire pie in one sitting? Of course not. The money you have spent on that pie is already gone. Your financial situation will not change if you eat the entire pie, only your health will change. Sickness. So invite some neighbors over to eat it with you, or better yet, knock on their door, tell them it is over a week old, and offer it to them as a gift, while it still looks and tastes yummy
Injury at the ski resort. Don’t keep skiing because of the price of the lift-ticket. That money is gone. Allowing the sunk cost fallacy to fool you into continuing on the slopes will only cause more injury. Foolish decisions are those that are made after determining there is nothing to gain, and much to lose. After set-backs, take stock in your current situation, and then make new decisions.The candy bar that fell on the floor, in the bathroom. There is no five-second rule there. You will get sick from it. Please just throw it away.
After dating somebody for six-months, you now feel they are wrong for you. This investment is huge. You’ve invested emotion, time, effort, and money. I know this is hard for us, but the concept is the same. Take that snapshot of your current situation and reset. All of your investment is in the past, so end it now, before you invest more. You’ve gained experience, so it isn’t a total loss. Remember to keep your head in the “logical” mode. Very hard to do with this one.
You may not be a gambler, but this fallacy will effect all of us at some point. Gambler’s fallacy occurs in cases of set probability. It causes one to believe an outcome may be based on previous outcomes. The simplest example is a coin-toss. The probability of getting heads is 50% chance every single time you flip that coin. The odds of flipping heads four times in a row is 6.25% chance, before ever flipping the coin. If you’ve flipped heads four times in a row, you will think to yourself “The most likely outcome of the next flip will be tails, since that is due.” You have just been deceived by the gambler’s fallacy. Every time you flip a coin, there is a 50% chance of getting heads, regardless of how many times you previously flipped heads in a row. Making decisions based on this deception is foolish.
A real-world example of this, outside of gambling, is having kids. My aunt and uncle kept having girls, year after year, girl after girl. With every new baby girl, they felt the chances of having a boy was ever more likely. Finally they did have two boys in a row, after having all of the many girls. Persistence paid off, but the odds never changed.
In business, it is very important to be level-headed and make decisions based on statistics and research data. There are many biases that contribute to making foolish decisions as well. I will cover that in my next blog post about decisions. Let go of the past, though learn from mistakes. Reassess your situation after realizing that your current initiative is a bad idea. Be careful though…plans don’t always run smoothly, and losses occur along the way. Base your realization on study and research, not on emotions from loss. Remind yourself that loss causes stronger emotions than gain will.
Thank you for reading:
Decisions – Free Yourself – Avoid Fallacies
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