Money decisions: The trick to learning when to cut your losses

The trick to learning when to cut your losses

We’re bidding farewell to 2018 with some of BBC Capital’s greatest hits from over the last year. With these compelling stories, indispensable tips and expert insight, you’ll be ready to make 2019 the best it can be. Madeline Grant is Editorial Manager at the Institute of Economic Affairs You’ve popped down the shops to pick up some milk.

Why would a gambler keep playing, even after losing a lot of money? Economists call it the sunk cost fallacy, a phenomenon which drives us to make bad decisions. This is the logic that says ‘I’ve sunk a lot of money into this project. I can’t just scrap it now. I really should make sure we reach this milestone.’

We all do it. Ever gone to the cinema and stayed to the end of a film you actually loathed 10 minutes in – or watched yet another season of what was once your favourite TV show? This is the logic that says “I’ve sunk a lot of money into my old car. I can’t just scrap it now. I really should replace that faulty gearbox”. (See also: those who stay in bad relationships for several additional years because they don’t want their time together to have been ‘all for nothing’).

Solution: When weighing up whether to persist with a course of action, he says, always ask yourself: ‘What would I gain or lose if I stuck with this option, and what would I gain or lose if I switched?’

Reflecting on the entire chain of decisions that has led to where you are now, and considering the counterfactuals – in other words, what’s true and not true, a reality check. “If presented with the same choice again, would I make the same decision? If not – why not?”

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