Finance Analogies: Disregard Sunk Costs When Investing

A finance analogy explaining why we should disregard time and effort invested in the past when deciding what to do in the future: 500 words.

My first career was in accounting and finance. You’d think that there wasn’t much overlap between finance and psychology, and you’d be right, however I have occasionally come across principles of good financial management that I like to relate to clients. Here’s the first…

Disregard Sunk Costs

When determining whether to commence a project we must assess whether the project benefits will likely exceed the costs. This is not an exact science, but the idea is straightforward – we need to decide whether this is a good investment.

However, project managers sometimes find themselves part-way through a project when the viability of the endeavour is called into question. At this point decision makers may get distracted by what are called sunk costs, which are the costs already incurred on the project.

When deciding whether to continue with this project we should disregard the sunk costs. This is because the sunk costs cannot be recovered; that money has already been spent, so no matter what happens next we are not getting it back. If the stakes are high then accepting this reality may entail facing some complex negative emotions, so we’ll have to let these wash over us if we are to make the right decision.

But we do want to prevent, as the saying goes, throwing good money after bad. So our analysis is like wiping the slate clean and performing the cost-benefit analysis again, to ensure we get sufficient benefit from any further money that we spend.

In a similar way, you may find yourself part-way through a life project, such as a marriage, when it begins to experience problems. Should you continue with this marriage? What if you have been with the person for 25 years? A 25-year investment in a marriage – surely it would be a waste to throw that all away? But these years are sunk costs. You can never get that time back, but you can ensure that the next 25 years are well spent. And it may well be that investing more years in the same marriage would be worthwhile, but it may also be that spending those years by yourself, or with another person, would provide a better return on your investment. Your task is to decide what is best for the future, not justify decisions made in the past.

I have learnt this lesson the hard way by persisting with life projects of my own well past the point at which I should have quit. For example, although my business career had its moments, it was never really for me, but I doggedly persisted with this career because I had spent so much time, effort, and money on becoming qualified. (This wasn’t the only reason of course, but it was particularly significant in the years after I completed my qualifications, when my perceptions of waste were strongest.) If I had accepted this reality earlier I could have enjoyed the benefits of my new career for longer. Better late than never though.

How to Use Mindfulness

How to use Mindfulness for improved psychological wellbeing: 850 words.

The psychological practice of Mindfulness (derived from Eastern meditation practices) is de rigueur at the moment, being promoted as a standalone practice for psychological wellbeing, and forming part of a number of evidence based psychological therapies. A straightforward definition of Mindfulness is to pay attention to the present moment, and to do so non-judgementally. And although anything can be done in a Mindful fashion, there are a number of formal Mindfulness exercises designed to promote this skill, such as paying attention to our natural breathing.

When running therapy groups I noticed that my clients thought of Mindfulness mainly as a relaxation exercise, but Mindfulness can help in more ways than this. What follows is a summary of ways that we can use Mindfulness to promote mental wellbeing. I will start with the simplest uses, and progress to trickier, but potentially very rewarding applications.

Relaxation

An exercise like Mindful Breathing can focus our mind on the rise and fall of our breathing, these natural rhythms serving to calm an agitated mind. And some people will combine Mindful attention with relaxation exercises, such as controlled breathing and progressive muscle relaxation, which are designed to calm us physiologically as well as psychologically.

Distraction

Our attention is a limited mental resource, and when our mind is focussed on a certain aspect of the present moment, it is not thinking about other, possibly less pleasant things. Hence Mindfulness as a form of distraction can help to dampen distressing emotions, and reduce worry and ruminative thinking.

Insight

Much of our mental and physical activity occurs automatically and outside of awareness. Anybody who has regularly driven along the same route has probably experienced getting to their destination without noticing a single part of the journey, perhaps lost deep in thought the whole way. But the car wasn’t driving itself, (although that technology is on its way!), so many parts of your brain must have been working diligently in the background. In a similar way, many of the negative mental processes implicated in mental health disorders occur automatically and outside of awareness.

Exercises like Mindful Breathing, Eating, and Walking, train us to become aware of activities that are frequently automatic, and to examine them with curiosity, rather than jumping to an instinctive judgement.  We can then apply this same skill to other automatic events, particularly the unhelpful thinking patterns, corrosive emotions, and reactive behaviours that contribute towards mental health problems. As a former management accountant we used to adhere to the maxim ‘what isn’t measured can’t be managed’, and in psychology we could say that ‘what isn’t noticed can’t be changed’. So the greater insight we can achieve with Mindfulness allows us to begin that change process. Be aware though that noticing unpleasant thoughts and emotions for the first time can be confronting, so it’s helpful to have a therapist or other trusted person available for support.

Confronting Unpleasant Emotions

Negative emotions fulfil important functions, and must play a role in our lives. But we tend to avoid what we don’t like, and very few of us like our negative emotions. Taking the edge off an unpleasant feeling is okay, but there is plenty of evidence that excessive avoidance of unpleasant emotions is ineffective in the long run, leading to greater negative emotion overall. Hence we are better off learning how to confront and understand our negative emotions, so that we might respond to them in a more considered way. Being Mindful of both the mental and physical components of our emotions, paying attention to them with curiosity rather than judgement, can teach us that these are just sensations like any others. With dedicated practice we can learn to weather the storm, ‘sitting’ with our emotions long enough to decide how best to respond to them.

Control

A great paradox of Mindfulness is that by learning to simply observe internal and external events, (including our thoughts and emotions), instead of trying to control them, we are in fact better able to control how we respond to them, and hence influence how they impact upon us. This is because many of our reactions to events are automatic, born from habit or reflex, and our attempts to control particularly internal events, like emotions, are ineffective in the long run. The restraint of a seasoned Mindfulness practitioner allows them to respond to events in a more controlled manner, consistent with their best interests in the longer term.

A Way to Live

If we integrate Minfulness into our lives then we begin to live in the moment. And the reality is that the present moment is all we have. Sure, there are memories of the past, and we will have new experiences in the future, but even these things can only be thought about in the present moment.

An old supervisor of mine used to call thinking about the past or future ‘time travel’. It is important to learn from the past and plan for the future, but if we spend too much time travelling then we miss out on the present anyway, so what was the point of all that thinking?