Cutting your losses

It’s a tricky thing. The longer you pursue a course of action, the higher your buy-in becomes, the bigger your loss when you walk away. This results in delayed decisions to cut losses, which increase the losses, which delay the decision. Most of the time, we either never make the decision, or finally do it when we achieve maximum loss.

This death spiral does not only come with sunk costs (what it’s already cost you) but also with opportunity cost. Every decision to stay this course also means you cannot pursue a different, more profitable course.

It’s a fight against our psychology. We are loss averse. The bigger the loss, the more averse we become. There is a way to beat it. Pre-commit. Like setting an alarm for cutting losses. You set it the night before.

Check out this great TED talk by Dan Ariely.

Yaroslav Кorshikov

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