If you happen to have cash in your wallet right now, take out a note and have a look at it. It’s just a piece of paper. It has a picture of someone famous on it, a few words and a number. That’s what money is.
In real terms, it is a medium of exchange created because bartering got a bit tricky, e.g. how do you value your cow when you want to swop it for a sack of grain. But, as you will see, not all dollars are equal!
Sounds all very rational doesn’t it and it kept the economists happy. But the economists forgot a very important point. We aren’t rational! So, when we see the piece of paper with pictures and numbers on it, we see a lot more than a symbol to buy stuff. We see all sorts of emotions and meanings and it’s different for men & women. Continue reading →
Throwing good money after bad or the ‘Sunk Cost Fallacy’ is another form of overspending that we can slip into without realising. It could be the house renovation that becomes the never ending money pit and deep down we know we will never recover these costs when the house is sold.
Sunk Costs are everywhere and they don’t occur only in your finances or business. Have you sat through a really bad movie thinking “oh well, I’ve watched an hour so I may as well watch the rest”. Gottcha!! You have just succumbed to a Sunk Cost.
“In for a penny, in for a pound” my Dad would say, as we headed to the local eat-all-you-want buffet restaurant for a family dinner. “I’ve paid my $25.00 (ok, this was a little while ago), so I am going to get my money’s worth and eat as much as I can”. Over the course of the next couple of hours he was true to his word!
So what is the Sunk Cost Fallacy? Well, in a nutshell: we keep making decisions (monetary or otherwise) based on how much we have already spent on a project. It’s hard to let go of something that is going backwards, or not complete an expensive project even though the cost of continuing just isn’t logical. Continue reading →