0928-The Sunk Cost & Loss aversion

First, let's define the sunk cost and loss aversion before we try to discuss how they influence our daily decision-making process.

Sunk Cost

A sunk cost is a cost that has already been incurred and cannot be recovered.

Source: Investopeida.

Example: 

You brought an pricey dress howerver it didn't take too long before you realise it's not your style. Even you didn't fancy it anymore, it took up your wardobe for years and it didn't get a second chance to be worn.

You don't want to throw it not due to your obssesion, but it cost you so much early on. 

Loss Aversion

loss aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains.

Source: Wikipedia    

Example:

Four option below, in two scenerios, which two would you choose?

To Gain:

1. win $90 for sure;

2. win $100 at the chance of 90%.

To Lose:

3. lose $90 for sure;

4. lose $100 at the chance of 90%.

Most of us would choose 1 and 4, which was excatly i did. This is can be attributed that we are very senstive to the loss rather than gains.

In my opinion, these two things are actually closely related. 

In an optimal situation, microeconomist would suggest us do NOT consider the sunk cost when making decisions, but we simply can't because we hate the loss of the sunk cost!

It's always good to reliase your ego and blind spot and learn how to corp with them.