The human brain is a funny thing. While we like to think that we are these logical machines, with a cool and calculated ability to look at things, the reality is that we are pretty poor decision makers. Our systems that were designed for the a different era aren’t always naturals for modern day decision making. That’s why it’s so important to have a complete set of mental models to consider when making decisions.
One such model to keep in your pocket is the sunk cost. A sunk cost is something you’ve already spent and can’t recover. In business this means that just because you’ve spent “x” amount of money on a project, if you decide further investment is a bad idea, you don’t keep spending because you’ve already spent a bunch of cash.
In your personal life the same thing applies. If you’ve bought stuff that you now realize was a bad idea, should you keep it? There is a simple way to make that evaluation. Pretend as if you didn’t currently own that object and decide if you would buy it today.
For example, if in your big spending days you purchased a house that was too far from work (creating a huge commute) or way out of your price range (keeping yourself house poor), don’t keep it just because your stuff is in there. If the house is an objectively bad idea, SELL IT!
In a prior life, I bought a brand new 2008 4runner. At this point, it’s paid off, I’ve treated it well, and I really do love my ride. BUT, I’ve lately been thinking about my 4runner in the context of sunk costs. Would I buy myself this vehicle if I didn’t already own it or would I make an alternate decision?
I think at this point, people like MMM have convinced me that driving an SUV daily is silly and wasteful. I spend most of my time in my car by myself, driving to and from work. I don’t need all that carrying capacity 99% of the time. What’s ironic is that the few times I could actually really use that space, it’s not enough! I’m usually trying to haul dirt or trees or lumbar and what I really could use is a truck.
So as I look at my 20 mpg 2008 4runner with over 100,000 miles, I wonder what are my current best alternatives? After some digging, it looks that for only a couple thousand more I could move from my 4runner to a 2015 Honda Fit with under 20,000 miles. That little sucker would get double the gas mileage, reduce the mileage on my vehicle by almost 80,000, offer some nice features mine lacks, and be much more fit for my purpose. In addition, there are some pretty easy mods, like a roof rack and a tow hitch box that can add a lot of space when needed (like our drives home for Christmas).
You can apply all the same logic to anything. It doesn’t need to be a car or a home.
Having said all of that, I haven’t quite figured out if I want to sell my SUV and make the switch. So what do you guys think? Keep my first brand new car, the 4runner that I love? Or switch to a 2015 Honda Fit?
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Munger: The Psychology of Human MisjudgementJune 26, 2017
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The AC Interview Series with Nate from Investment ZenJuly 18, 2016