Sunk Cost Bias

I see this problem often in my work with clients and in teaching: people find it difficult to let go of an item (or idea or belief or hobby or activity....etc...) because of the cost incurred in getting it. Sunk Cost is a term economists use for something spent that cannot be recovered.

Read on if you have trouble clearing out stuff in your life that bring no value to you.

The Sunk Cost Bias and 4 Ways to Overcome It

(Re-posted from litemind and published by Luciano Passuello)

The sunk cost bias is a thinking trap that not only slows down personal improvement efforts, but one which can make people literally waste their whole lives on — something I’ve seen happening with disturbing regularity. The good news is that, like most thinking traps, the biggest step you can take to overcome it is by simply becoming aware of it.

Suppose you pre-ordered a non-refundable ticket to a basketball game. However, on the night of the game, you simply don’t feel like going anymore: you’re tired, there’s a blizzard raging outside, and the game will be televised. You regret the fact that you bought the ticket because, frankly, you would prefer to stay at home, light up your fireplace and comfortably watch the game on TV.

But the fact is that you did buy the ticket — and it was quite expensive and hard to get. What would you do?

The Sunk Cost Bias Exposed

Sunk costs are costs that are irrecoverable. It’s something that you already spent and that you won’t get back, regardless of future outcomes. It’s like that gym club membership you bought: whether you get its benefits or not, the money is gone and there’s no way to get it back.

In the basketball game ticket example, the point is that the money is already gone, so now you are better off doing what pleases you best. So, unless you can sell the ticket, just forget about what you paid for it. You are better off using it to help fuel the fireplace while you comfortably enjoy the game on TV.

This is, of course, easier said than done. There are many psychological blocks in the way of simply discarding an expensive ticket. And if that holds true for a mere basketball game ticket, imagine how strong that effect is when it comes to, say, abandoning a long-time relationship that you invested so much time on, but that just isn’t working anymore.

That’s the sunk cost bias. It’s what you may have heard as “throwing good money after bad”, but it isn’t just about money: any type of investment you make — time, money, effort, anything — is subject to this thinking trap.

Are You a Victim of the Sunk Cost Bias?

Persisting with bad decisions due to our irrational attachment to costs that we cannot recover has become so common that you can find them just about anywhere. Big organizations and governments excel at it. (A government that insists on a war so the lives already spent “are not wasted” comes to mind, but I digress…)

The fact is that this mental trap permeates our decision making and affects not only organizations, but it deeply affects us at a personal level, too. Check out some examples:

• Bad overall life decisions: What would you say about persisting on an unfulfilling job or career, just because you ‘invested so much time in it’? Or persisting on a bad relationship, just to ‘make all those years worth it’? These are the saddest cases of the sunk cost effect that I know, since people can literally waste years — if not their whole lives — because of it.
• Bad financial decisions: Do you know anyone who refused to sell something for a perfectly reasonable price, just because they spent so much money in it (maybe property or stocks)? What about casino gamblers that simply won’t quit, claiming they need to make the money that they already lost “worth it”?
• Bad Everyday Decisions: You ordered too much food, but you eat it anyway despite being full. You keep useless clutter in your home, if only because you paid for it. You watch a bad movie up to the end, only because you started watching it. The examples just go on and on. The consequences for each of them may seem trivial at first, but if you think about it, we make these mistakes so often that they add up pretty quickly.

Why Do We Fall Into the Trap and How to Avoid It

So, if dwelling on sunk costs is a bad idea, why do we do it? More importantly, how do we overcome this thinking trap? Here are 4 main reasons why we do it, along with ways to overcome each of them.

1. We Want to Make the Investment Worth Our While

This is the fundamental reasoning behind how we deal with sunk costs. We have a genuine interest in making our efforts worth our while. We don’t want to feel that we spent anything in vain — time, money, anything. However, even if we know deep inside that our approach is wrong, we still have trouble abandoning it.

Solution

Sure, we all expect to have a good return on what we invest. It would be insane not to. Just make sure you’re not on a situation solely because you made the investment in the first place. You don’t make a bad move any better by dwelling more on it, unless you can effectively make something that changes the expected outcome.

Stop spending resources on a bad move — throwing good money after bad — immediately and start spending these resources on a new one: Cut your losses and move on!

2. We Fear Failing and Looking Foolish

We live in a success-oriented culture. Cutting losses means admitting you made a mistake, if not in public, at least to yourself. Our egos will always stubbornly try to hold us to our commitments, so we don’t need to admit our imperfections. If you made a public commitment, you’re even less likely to break it, as there will probably be a lot of explaining to do.

Solution

Allow yourself to make mistakes. Quickly admitting your mistakes is much more productive than entrenching yourself in a situation just to “save face”. Be aware that quitting is not failing (actually, sometimes it’s exactly the opposite).

Better yet, do like Socrates and think differently: become proud of admitting your errors. Change your attitude from hiding mistakes to actively exposing them. Look for them: the more, the merrier. You’ll surely feel defenseless and uneasy at first, but once you get used to it, you’ll feel invulnerable to harsh criticism.

Moreover, instead of focusing on the sunk costs, take pride in having recognized the costs associated with sticking to the old approach.

3. We Become Attached to Our Commitments

After we decide to do something, we feel attached to what we committed to. And the bigger the commitment, the harder it is to let go. Not only that, but it’s a human trait to be overconfident that everything we set ourselves to do will pay off. We’re biased when we evaluate the probability of success of already-made commitments. (This is known as overly optimistic probability bias.)

Solution

Be aware of the natural bias to stay on your current course of action. While considering other options, evaluate the status quo as it was just another option, rather than the front-runner.

Also, try to detach yourself emotionally from your past decisions. Be especially careful with things that worked at some point in the past as this is not a guarantee that they’ll work in your favor again.

I like to practice what I call “zero-based thinking”. Forget about the past and consider this very moment as your “point-zero” in time: act like all you have is the present. I often do this by pretending that I just woke up with some sort of amnesia. I imagine myself in my current situation, but without any knowledge of how I got there. This way, it’s much easier to focus on my current situation, instead of clinging to past decisions that would drag me down.

4. We Lose Sight of Our Underlying Goals

Sometimes we become so preoccupied by how much time and effort we put into something that we lose sight of its relevance in the greater scheme of things. We become attached to the means and forget about the ends.

Solution

Always be mindful of long-term objectives. Don’t confuse any greater goal you want to achieve with the specific means of implementation you’re attached to. Don’t get caught up in justifying your current actions.

Moving away from the basketball game example, suppose your original goal was to have fun, so you rented a movie. If the movie turns out to be a bad one, don’t forget that your goal was not to spend two hours watching a movie, but to have fun. So, turn it off and go have fun, somehow.

Let Go of the Past, Move On

I’m not recommending that you become a quitter by any means. The point is to be always aware of your current situation. If you decide to stick with your current approach, that’s great. Do it consciously and for the right reasons.

And remember that the greatest example of sunk cost you pay is with your own time, and which you will not be able to recover: all that you lived up until now is gone — you just can’t reclaim that time. Stop clinging to the past and make the most of your life right now.

Effective Time Management

Below is a lengthy but very useful article on time management by recognized business coach Allison Darling. It was written for entrepreneurs, but it works for most everyone. As I say in all my presentations to groups: "We all have too much stuff and not enough time."


I appreciate the concept of "return on investment" for our time. We commonly use this expression when discussing money, but it works the same way with our precious time. What activity (use of time) will result in the best outcome?


Some of the tips here may help you get a handle on your time issues.

Best wishes for your Creative and Convenient Life!

Becca
----------------------------------------------------------------------------------------------
By changing how you think about your tasks, you can create a better return on investment for your time.

Do you have more 'to-dos' than time in your day? Is lack of time preventing you from reaching more of your goals? If you had more time, what would it mean to your business, your finances, your family - your life? No one is given more than 24 hours a day. How then do some people accomplish so much while others drown in incomplete 'to-do' lists, missed deadlines and unmet objectives?

Effective time management is the process of ensuring that all of your time is spent on activities that move you closer to your goals. What you do is far more important than how quickly you do it.

The bottom line, how you spend your time determines your success. The most successful business leaders and entrepreneurs invest their time very carefully.

Those who develop effective habits for time management create a competitive advantage. The secret is understanding where time is best invested and developing systems, processes, behaviors and habits for effective use of time and priority management.

Change Your Attitude
To change results it is necessary to change behavior. Significant behavior change requires a change in perspective or attitude; in other words, how you think. Effective time habits require effective time attitudes. Think about your time as a limited resource to be invested rather than spent.

Know What You Want
Make a list of your top priorities, both personal and professional. This process helps clarify where to focus your energy and speeds decision-making when events arise that are not top priorities. Daily, weekly, monthly and annual prioritization is a powerful time management habit.

Establish Your Personal 80/20 Rule
Typically, 80 percent of success comes from 20 percent of your effort. Determine what your most profitable 20 percent is and spend the majority of your time in those activities.

Eliminate Unproductive Activity
One of the most practical exercises for better time use is a personal time study. Track activities in 15-minute increments for 3-5 days. Look for opportunities to eliminate unproductive behaviors that do not pertain to top priorities. Often the greatest gains in productivity are the result of eliminating bad habits and non- value added activity.

Automate
Use technology to your advantage. Automation is a great way to multiply your efforts. Review your time study for opportunities to memorize transactions, create automatic activity series, sort e- mail, auto-complete fields, etc. While it takes time to set up, it is always a wise investment.

Delegate
If the return on your time investment is less than the cost, yet the task is too important to eliminate and cannot be automated, consider delegating it. Opportunities abound to use staff, a virtual assistant, contract professionals, temporary help, family members, etc. Eliminate dependency on specific individuals by creating checklists and procedures for each delegated task. This helps bridge the gap if you have to do the task again and improves training effectiveness with new people.

Simplify
Look for every opportunity to simplify processes, decision- making, communications, proposals, customer tracking, etc.

Leverage
This concept refers to multiplying the return you get from every effort. Perhaps creative work can be re-purposed or meetings can serve multiple functions. Look for every place to consolidate your efforts and get greater return on your time investment.

Vision
Take time to create a clear, succinct vision for both yourself and your organization. Don't stop at the words; create pictures of what it will look like once you accomplish your vision. Imagine what it will feel like once you get there. The more emotionally tied you are to your vision; the easier it is to remember the success habits you are trying to create.

Time Blocking
Complete similar types of work all at the same time. Opportunities for blocking include client visits, telephone work, computer work, writing, e-mail correspondence and completing personal tasks. This strategy maximizes your time investment far better than moving from one unrelated task to another throughout the day.

Analyze
Keep track of what's working really well, personally and for the business. Also, track opportunities for improvement. Review your list regularly and implement new habits, processes and systems at every opportunity.

Successful entrepreneurs create highly effective habits. If time management is actually effective priority management, then creating habits for better self-management is critical to your success. Think about the impact that one or two new time habits and/or attitudes could have on your business over the next year.

Perhaps your best time investment right now is creating your personal action plan for highly effective time habits.

Reprint permission granted by author Allison Darling, ManagementConcepts

Tax Time

That most dreaded season of the year is fast approaching - Tax Time! Below are some ideas for improving your filing system and collecting the documents you need. An effective process will save you time and frustration next year, and possibly even increase your deductions and save you money! That makes the organizing investment now all worth it now, right?

First, plan to keep all your files with the necessary papers in one place. It should be fairly accessible since you'll collect documents throughout the year that need to be stored here.

Next, set up a folder for each of these categories (if they apply to you), which will create storage for most everything needed for your personal tax files:

* Income- Include pay stubs, W-2s, 1099s, interest statements, and dividend statements

* Medical- File receipts for medical expenses, and health insurance out-of-pocket expenses

* Donations-Include receipts (with lists of items) for both cash and non-cash donations

* Real Estate- File interest statements from mortgage, tax assessments

* Child Care- Payment receipts for potential deductions

* Tax Correspondence- Any letters from the IRS or your state revenue service

* Student Loans - File statements of loan interest paid

* Misc. Receipts- Add any receipts that might be needed for deductions, particularly if you are self-employed

* Payments- Include any records of advance tax payments

* Past Year Tax Returns- File old tax returns by year. These can be stored in less accessible areas if storage space is an issue

A little time now and minimal maintenance through the year will make 2010 a snap!

Simplicity is the New Black

I realized the world had truly turned upside down when I saw this full page ad in national magazines this month. It was very simple and spare, pale gray background, and these words were printed in the middle:

___________________________________________________________________

HERE'S TO LESS

Our lives are filled with things. We're overwhelmed by possessions we own but do not treasure. Stuff we buy but never love. To be thrown away in weeks rather than passed down for generations.

Perhaps it will be different now. Perhaps now is an opportunity to reassess what really matters. After all, if everything you ever bought her disappeared overnight, what would she truly miss?

___________________________________________________________________

Guess which giant global company produced this very evocative ad......give up? It is DeBeers, the diamond mega-conglomerate. Now, forget for a moment the fact that they are, of course, still selling some pretty conspicuous consumption, and perhaps you have issues with the diamond trade itself, but see this ad as the start of a trend rather than a fad. DeBeers is known for memorable, classical, beautiful, and very successful advertising campaigns. Their super savvy marketers recognize and reflect the shift - or possibly even the re-set - of our consumer world.

One of the best writers in America, Anna Quindlen, titled her most recent article in Newsweek "Stuff is Not Salvation" . The sub heading is "As the boom times fade, an important holiday question surfaces: why in the world did we buy all this junk in the first place?" She points out that a person in the U.S. replaces their cell phone every 16 months, not because it is old, but because it is oldish.

As a professional organizer I see the results daily of our years of rampant consumerism, forced along by brilliant and overpowering advertising. We are blasted at every turn by promises that this product or that one will make us healthier, smarter, younger, sexier, more productive, more popular, more lovable, more attractive, and yes - happier. It was irresistible, and our credit cards and rising home and stock values made it all so easy to comply.

I'm certainly not a minimalist, and I don't think we'll be returning to our agrarian roots, but this may be the time to pause and contemplate, to set new goals for 2009. Focus on the genuinely important, filter out the unnecessary and the distracting. The media is pointing or reflecting the way, the zeitgeist is clear. "Here's to Less".

12 Tips of Christmas

I put this together for my December e-newsletter. Subscribe free at My Website.

Here are a dozen ideas to help you minimize the work and maximize the pleasure of the season. Thoughtfully choose the activities that will be meaningful for you and your loved ones this year, and streamline or discard the rest.

1. GET IN THE HOLIDAY MOOD
   If you need to set the holiday mood to start wrapping gifts and writing out cards, take out the seasonal MUSIC or MOVIES and pop one in. You’ll be surprised how quickly you’re ready to tackle the holidays!

2. CLEAR OUT

Clean out the old to make room for the new! Get rid of toys that your children have outgrown, are broken or no longer of interest to them. The same goes for the clothing closets. If you haven't worn it in the last 2 years, sell it or donate it. Take advantage of the year-end tax DEDUCTIONS.

3. SIMPLIFY
   Carry a small NOTEBOOK in your purse. Write down your thoughts immediately: things to buy, things to do, etc. This will free you from those nagging doubts and fear of forgetting something vital. Refer to it often.

4. GIFTS

Once you come across an idea in CATALOGS, sales flyers, or elsewhere tear the page out and place the idea in a folder titled "gift ideas. If online make a note of the URL, or print the page and add to the file. Keep the ordering information and clip or staple them together with the name of the potential recipient. This could be a year round project making holidays that much easier. See below for my ideas for Clutter-Free Giving.

5. RECEIPTS

Get a large white envelope and label it Shopping Central. Put your shopping list there and keep ALL receipts in this envelope. This will make shopping and any returns a breeze.

6. HOSTESS GIFTS

Keep a supply of candles, boxed candy, wine or other small gifts on hand to use as GENERIC hostess gifts, teacher gifts, mailman gifts, etc. Or buy lots of poinsettias as soon as they appear in the stores, then use them to decorate your house and give them away as needed.

7. WRAP IT UP

If you must wrap, remember the 3 R’s: reduce, reuse, and recycle. Reduce waste by wrapping gifts within gifts. Reuse paper, bags, or other containers. Recycle by choosing wrapping materials that won’t end up in a landfill.

8. DECORATE
   Take SNAPSHOTS of your decorating arrangements to save time and decision making next year. Order double prints. Keep one set with your Christmas decorations to serve as instructions. Put the other set in your safety deposit box with your household inventory for insurance purposes.

9. STORE
   Consider giving decorations you haven’t displayed in years to new homes. Make a list of supplies you’ll NEED for next year, such as wrapping materials, cards, extension cords, and replacement light bulbs. Determine how many and what size containers you’ll need for storage. With this list, take advantage of after-Christmas SALES. Stick to your list, being careful not to collect more clutter just because it’s on sale.

10. MORE STORE

Put away sorted decorations according to GROUPINGS. For example, keep all your tree trimmings together rather than scattering them throughout your storage boxes. Be sure to label each container according to its contents. Consider numbering your boxes according to decorating priority. “Box 1” would contain those items that you consider essential and would want to unpack first, such as decorating photos (see #9), holiday music, and special recipes. Take this opportunity to store other items that you ONLY use during the holidays, particularly those that take up valuable kitchen cupboard space like serving platters.

11. GUESTS
    If you expect overnight houseguests try out the room by spending a night there first. Pretend you are a hotel guest and look at it with outsider’s eyes. Is the bed and room comfortable? What items would you want – clock, nice hangers, tissues, extra blanket? Does the room need to be CLEANED? This is a great time to get the room de-cluttered - throw out and donate some of the items that have inevitably found their way in.

12. NEXT YEAR
    The day AFTER Christmas, make next year's "to do" list so that you won't have to work so hard again! Shop year round for gifts, decorations, and cards for those you love. Keep a running list of things you enjoyed, recipes that were a hit, activities to skip, and tips for making things easier on you and your household.

Do I Really Need This???

Almost everyone has a hard time letting go of items that no longer serve them in their life. I often find that asking the right question helps people make the decision about whether to keep or to put something back into the Universe. To paraphrase English designer William Morris, I truly believe we should not house anything we do not feel to be functional, beautiful, or both.

Here is a series of questions to ask yourself compiled by our NAPO (National Organization of Professional Organizers) forum. They cover many situations and lots of types of stuff that can come to overwhelm us.

General Stuff

* Was it a purchase mistake? (if so, it does not make it better to keep it)
* Does it take more time and effort to manage than it is worth?
* Does it make others unhappy to see it? Am I putting things before people and relationships?
* Do you need it? Is it redundant (i.e., do I really need 3 measuring spoon sets)?
* Do I love it? Does it make me happy or unhappy to see it?
* If you were moving, would you pay to have it packed and moved?
* Would you buy it again?
* Is it broken, and if so, are you ever really going to fix it?
* Are you ever really going to finish this project (book, quilt, etc.)?
* Can you borrow or purchase another one, if needed, without spending a fortune or having trouble finding it?
* When is the last time you used it (assuming you knew it was there)?
* If you knew that someone else would really benefit from having this (i.e. if you found a great place to donate it), would that make it easier for you to let it go?
* Is this adding value to your home or business?
* Is this item getting in the way of your ability to find what you need, when you need it?
* Will this help you make or save money?
* How much space does it require (the more it takes, the more critical you should be in your decision to keep it)
* If you keep it, will you remember you have it? If you remember you have it, will you be able to find it?

Paper

* Am I legally required to keep it (i.e. vital & tax records), and if so, for how long?
* Will I actually use it/refer to it/need it?
* Is the information still current?
* Can it easily be duplicated or created if needed again (i.e. found on the web)?
* What's the worst that can happen if you toss it?
* Is it a duplicate?

Clothes

* Is the item in good condition?...does it have stains or tears or is it too worn)?
* Is the item still in style (And no.....1980's shoulder pads are not going to come back into style in the same exact way)?
* Do you love the item, or even like it? Does it make you feel great to wear it?
* When was the last time I wore this item.Would I use it again now that I remember that I have it?
* How many do I currently own of this type of item (maybe 20 pairs of black pants are too many)?
* Does it fit? If not, is it within a reasonable number of size ranges of my current size to keep it?

Memorabilia

* Do you have anything else that reminds you of this (event, person, time)?
* If we took a picture of it, would that make it easier for you to let it go?
* Am I keeping it because someone gave it to me and I'll feel guilty if I get rid of it?
* Does the sentimental value exceed the practical value (if so, by all means, keep it!)

Clutter Free Giving

It's the time of year when we look for ideas for gifts to give and to (subtly) request. My clients and those attending my seminars and workshops know that I am passionate about reducing unnecessary "stuff" in our spaces and lives. What I've come up with is the concept I call "giving consumables". These are items that are used and enjoyed quickly without taking up permanent residence in our residence! Most of us have too many things and not enough time and serenity, so here are some ways to show we care without adding to the clutter.

This is my answer to the “oh no - another gadget/ knick-knack/ pair of socks/ dust collector” dilemma. The concepts can be valuable for a lot of people on your list, so use your imagination and customize them for your holiday gift giving and receiving for 2008!

Give Pampering

Give a gift certificate to a spa for a day of relaxation, some yoga classes, a massage, or a manicure and pedicure to someone who could really use a little bliss more than another kitchen appliance. They will think about you and smile during the entire serene process!

Give Treats

Make or purchase very special treats that people often deny themselves. Be sensitive to dietary restrictions, but gourmet foods, rich chocolates, or elegant wines or champagne are great choices that won’t permanently fill a cabinet. Luxury personal care items make lovely gifts if you know what they enjoy and use. Save space, your budget, and the planet by minimizing wrapping.

Give Fun

Tickets or season passes to the symphony, local playhouses, sporting events, or a favorite movie theatre show you know what they love, and they won’t end up stacked in the garage!

Give Time

Hire a service to help out the stressed out. Engage a cleaning or lawn service for a one-time or ongoing project, or purchase child or senior care services to give a respite to those with too many responsibilities. Get a mobile car care service to detail a vehicle at their home or office, or (my personal favorite) hire a professional organizer to help them re-claim their space and inner peace! Go to http://creativeconvenience.biz/ or call 501-620-0546 to request gift certificates.

Give Life

Supporting charities is a simple, significant way to share holiday spirit. For example, give meaningfully in the name of someone who already has much by purchasing an animal from Little Rock based Heifer International. These sustainable gifts provide training and self-reliance to those in need around the planet. Go to www.heifer.org to choose your special live gift.