Knowing 3 Great Economics Theories helps you Take Rational Decisions

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Indexes
  1. Decide with Opportunity Cost; Sunk Cost Fallacy and Prospect Theory
  2. Can the “Never give up” concept lead us to Sunk Cost Fallacy?
Photo by Mathieu Stern on Unsplash

If life gave you a chance to choose “3 things” that you'd have limitlessly, what would you choose?

I’d probably choose time, money, and staying healthy.

It would be great for each of us to have them, right? Unfortunately, we exist neither a magic wand nor 3 choices.

The world we live in has limited sources. That’s why scarcity is an issue of economics. That’s why we are forced to be smart with our limited resources during decision-making.

Let’s dive into theories that must be involved in the process of taking rational decisions and let’s see how our limited resources can cause us not to take smart decisions.

Decide with Opportunity Cost; Sunk Cost Fallacy and Prospect Theory

We have 2 different scenarios here:

  1. Scenario: “If you launched a project and have been working to invest in a cutting-edge product for a long time. Just 2 weeks left to finish all details. But you’ve realized that a competitor company has released a product cheaper and better than yours in every aspect. The worst thing is that you should invest more money to compete with it. What would you do?
  • Would you give up or invest more money?

2. Scenario: What if you had started the project just 2 weeks before the competitor company launched?

  • In which scenario is it easier to give up?

In the second scenario: Probably you’d feel more fortunate to just start the project. Giving up couldn’t be as painful as the first scenario. Since we don’t feel like we have too much to quit it. Right?

In the first scenario: You are likely to choose to invest more money because of that you put into account all money, time, and effort that was spent which means that you trap in sunk cost fallacy.

Let me elaborate on it;

Even though your field in the university doesn’t grab your attention, because of the time you have spent the last several years preparing for and studying, you don’t want to switch your field.

Since You consider that you are at a point of no return and must stick with your endeavor by keeping investing more time, money, and resources. Which means that you are experiencing the stuck cost fallacy.

You take irrational decisions by thinking about all resources you have spent and if you quit your degree, you think all has gone in vain and failed.

Furthermore, The authors of “Thinking, Fast and Slow” Kahneman and Tversky explained by Prospect theory that we have the tendency to avoid risk and overreact to losing than gaining. Even though another option has the same effect on our life. We hate the sense of failure.

All the above reasons detain us from take wise decisions.

Can the “Never give up” concept lead us to Sunk Cost Fallacy?

Photo by Miguel Gonzalez on Unsplash

Resilience and determination are two key values to succeed.

But If you look at the big picture, it can cause more downsides than benefits. We stick with anything that creates no value for us, the worst thing is that lead to spending more time and money in vain.

Besides, Even It causes stress and anxiety which are the main source of illness and end up affecting health negatively.

This is a point to remind yourself of another economic theory Opportunity cost: If You spend 100.000$ on a project, You can not spend on other alternatives such as education, traveling, or another lucrative project.

Essentially, the idea of opportunity cost encourages us to reflect on what other options are available and determine what we’re giving up in any choice we make.

Here it’s let check your opportunity if not quit a job/project that sucks

✔️missing an opportunity to sink money into a lucrative job

✔️Spending time wastefully instead of spending wisely and make a progress in a subject.

✔️Living a stress-free life

Just like money, our time, energy, and headspace are all valuable and limited resources — and we try to protect them. But sometimes, we end up losing even more in our efforts to avoid ‘wasting’ these precious commodities,- Dr.Amy White

Put into consideration the below important point before making up your mind.

  • Put into account alternatives and all criteria whatever you do before trapping in sunk cost fallacy.
  • Asking yourself that could you keep doing the same thing ıf haven’t put in the time, energy, and money.
  • Questioning the opportunity cost of your behavior or choice and thinking of better alternatives
  • Bear in mind that people hate loss and they are risk aversion. So don’t allow these to affect your decision negatively