The Little Blue Reasoning Book - Brandon Royal [22]
According to economic theory, any past costs, also known as sunk costs, have no affect on future decision making. The only thing that affects future decisions are the cost and benefits of the two (or more) alternative courses of action.
This means that if the net benefits of this meeting are deemed greater than the net benefits of attending this trip, then we forget about the trip and attend the meeting. Of course, we must factor in both costs and benefits. The benefits of attending the meeting might involve securing a large account, getting promoted, or perhaps finding out about a new job opportunity. The costs involved might include travel to the meeting and/or the time and effort needed to prepare for the meeting. The benefits of going on vacation may well involve having a relaxing, rejuvenating experience. The costs will include accommodation and personal expenses incurred while on vacation. Note that the cost of the plane ticket is considered a sunk cost and has no effect on the decision to go on vacation or attend the meeting.
From a rational perspective, it makes perfect sense to ignore sunk costs. But from a emotional standpoint, it may be very difficult to do so. We may view sunk costs as “wasted” costs and instinctively want to “save” them by investing more time and money in the project or undertaking. We’ve all heard of the saying “to throw good money after bad” and perhaps the telltale sign of the sunk cost dilemma are encapsulated by the words: “Just think how much time and money we’ve already spent.” Having spent time and money on a particular project or undertaking may have resulted in that project getting closer to completion, in which case the future costs to complete it and the benefits that will likely accrue from the completed project will ensure that work on the project will continue. However, the costs so far incurred are irrelevant to the future decision on whether to continue working on it or abandon it and change course.
It is especially difficult to detached ourselves emotionally from personal projects that have become “labors of love.” We must, however, at least acknowledge, that rationally, our previous time, effort, and money act as a sunk cost. In order to break our emotional attachment to sunk costs for the purpose of making an objective decision and possibly changing course, it is important to consider three things:
1) Recognize that cutting your losses does not necessarily mean you’ve made a mistake because your decision to pursue the original course of action may have been the smartest course of action at that time.
2) Enlist a few people you trust and ask them for their opinion. A person viewing our situation as an outsider may have a much more objective view of our situation.
3) Realize that most situations carry with them the seeds of greater benefit. Knowledge, skill, and insights gained from previous experiences can be applied to new situations moving forward.
HYPOTHESIS TESTING
Tip #18: For the purposes of hypothesis testing, the minimum requirement for causal inference is evaluation using a “two-way” table.
It is not uncommon to try to evaluate claims that have yet to be proven. This is the basis of hypothesis testing. Although hypothesis testing is usually associated with hard-core research, it also has wide-ranging applicability, including everyday situations: Do vegetarians live longer? Does TV viewing lead to violence? Does a new miracle headache drug work better than aspirin? Do stockbrokers make better stock market investment decisions than regular business people? Do I have cancer?
Invariably we end up asking whether one thing leads to another, and this brings cause and effect into play. The minimum requirement for causal inference is evaluation using a “two-way” table. This “two-way” table is a de facto matrix, used to contrast information according