There was a rich knight in the court of an agreeable king. One day the king got mad at the knight. Since the king had known the knight for a long time, he described three punishments to the knight and allowed him to choose one. The three punishments were caning, eating a gallon of farm fresh manure or expulsion from the kingdom. The knight accepted caning but half-way through caning realized that he would possibly not survive the full course of caning. Therefore, he begged the king to allow him to choose another punishment. The kind king agreed and the knight asked for a gallon of manure. After consuming half a gallon of manure, the knight felt dizzy with nausea and knew that he would certainly die, if he were to eat the whole gallon. Therefore, he begged the king to expel him from the kingdom. Our kind and immensely agreeable His Majesty agreed again. He then expelled the knight from the kingdom, asked IRS to attach his property to the government treasury and lived happily ever after.
Many people tell me that the knight was an idiot. If he had known his limitations, he could have chosen to leave the kingdom in the first place without suffering the ignominy of caning or eating the humble cow pie. I disagree since this conclusion is based on hindsight, while life choices have to made with foresight. I think that the knight was a bright smart cookie, who was willing to take risks and explore his limitations. Best of all, he was not afraid to take a loss and get out at the right time. By doing this he avoided the worst case scenario, which could have been the loss of his rear-end or death. Half way through caning, he accepted caning as his sunk cost, realized that enough was enough, took the loss and got out of the market. His next venture was equally disastrous but he knew when enough was enough and got out in time.
Most of us have trouble realizing when enough is enough and continue to throw good money after bad until we are overwhelmed by the worst case scenario. We keep on pouring money into projects several months after the return on investment has turned negative. Often the only rationale is that we have already invested several millions in this project, why not a few hundred thousand more to finish it. When you come across this logic, try to extend it ad infinitum and you will quickly realize the futility of such logic.
At several parties I have auctioned a one dollar bill for six to eight dollars before people realized that they were really being stupid. I begin auctioning a one dollar bill at the starting bid of 10 cents with a condition that I'd also seize the bid amount from the second-highest bidder. For instance, when the highest bid reaches 70 cents, the second-highest bidder realizes that he would lose his 60 cents, unless he raised his bid. Eventually, the bid for a one dollar bill reaches $1 and the second-highest bidder at 90 cents reasons that his loss would be 90 cents if he did not bid. On the other hand, if he won the bid at $1.10, he would only lose 10 cents. This reasoning continues with disastrous results for the bidders and usually they end up paying several dollars to me for a one dollar bill. Human behavior is not designed to accept sunk cost. Humans are inveterate loss-avoiders and have deep trouble accepting the notion of sunk cost.
I have another way of looking at the sunk costs using the notion of time machine. I say that I wouldn't worry about the past until I got a time machine that would allow me to go back in the past and fix things. Until that time, we can only change the future. Therefore, let's work on changing the future.
Many people tell me that the knight was an idiot. If he had known his limitations, he could have chosen to leave the kingdom in the first place without suffering the ignominy of caning or eating the humble cow pie. I disagree since this conclusion is based on hindsight, while life choices have to made with foresight. I think that the knight was a bright smart cookie, who was willing to take risks and explore his limitations. Best of all, he was not afraid to take a loss and get out at the right time. By doing this he avoided the worst case scenario, which could have been the loss of his rear-end or death. Half way through caning, he accepted caning as his sunk cost, realized that enough was enough, took the loss and got out of the market. His next venture was equally disastrous but he knew when enough was enough and got out in time.
Most of us have trouble realizing when enough is enough and continue to throw good money after bad until we are overwhelmed by the worst case scenario. We keep on pouring money into projects several months after the return on investment has turned negative. Often the only rationale is that we have already invested several millions in this project, why not a few hundred thousand more to finish it. When you come across this logic, try to extend it ad infinitum and you will quickly realize the futility of such logic.
At several parties I have auctioned a one dollar bill for six to eight dollars before people realized that they were really being stupid. I begin auctioning a one dollar bill at the starting bid of 10 cents with a condition that I'd also seize the bid amount from the second-highest bidder. For instance, when the highest bid reaches 70 cents, the second-highest bidder realizes that he would lose his 60 cents, unless he raised his bid. Eventually, the bid for a one dollar bill reaches $1 and the second-highest bidder at 90 cents reasons that his loss would be 90 cents if he did not bid. On the other hand, if he won the bid at $1.10, he would only lose 10 cents. This reasoning continues with disastrous results for the bidders and usually they end up paying several dollars to me for a one dollar bill. Human behavior is not designed to accept sunk cost. Humans are inveterate loss-avoiders and have deep trouble accepting the notion of sunk cost.
I have another way of looking at the sunk costs using the notion of time machine. I say that I wouldn't worry about the past until I got a time machine that would allow me to go back in the past and fix things. Until that time, we can only change the future. Therefore, let's work on changing the future.
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