Sometimes the uncertainty of the world leads us not to fear but to hope. There’s a commonly expressed belief that “anything is possible”. I’ve worked closely with executives who seem to believe that they can bend the world to their desires by sheer force of will.
Of course this doesn’t work in reality. Our control over future events in a complex world is very limited. Often the path we’ve chosen turns out to be an illusory path. Generally its not a bad thing because the new perspective will usually open up new possibilities and new choices that weren’t apparent at the beginning.
At some point, the odds of success may have dwindled so much that continuing on seems pointless. Admitting defeat is painful, but embracing failure and recognizing mistakes is an important part of learning how to make better decisions in the future.
One must avoid continuing on just because of past efforts. It appears to be a deep seated tendency to consider investment when making future decisions.
There is a reasonable rule that equates investment with current value. Any object which required great effort to obtain has great value because of the cost that would be required to replace it. We have to pay more to buy a gold ring than to buy a siver ring- so we perceive the gold as more valuable than silver. We’d have to be offered more to give up the gold than to give up the silver.
Equating cost with value doesn’t always work because value changes over time. If I pay a lot of money for a diamond and then a year later the market is flooded with diamonds from new sources, my diamond will be worth less.But because I equate cost with value, I’ll feel that my diamond “should” be worth more than its current value because of what I paid. In truth,its only worth what some one else is willing to pay for it. The same effect has been seen in studies of stock market transactions. Owners of shares that have lost value tend not to sell them, believing that they should be worth more and are resistant to accept less than what they paid for them. Sadly, this prejudice leads to investors making the often poor decision to keep their losers and sell their winners, when the exact opposite may be the case. Good decisions in the past are represented by those shares that have gained in value. They may represent the successful, growing companies.
In buying and selling, only the present value should be considered. Cost is known only to the owner and has no effect on current or future value. The losses up until now are often referred to as “sunk losses”. This is money or effort that has been spent, is gone and have no bearing on current value and need to be ignored when making decisions. Its as if every day is newly created and decisions to buy or sell have to be made only on the basis of the current market and belief about the future right now.
SImilarly, past efforts and plans have no effect on the chances of success now. There is only the current situation and belief about the future. Every day is new. We must decide which way to go at every moment as if the past had not occurred. This is why a plan is only a formalization of belief about the future and may need to be changed or abandoned if events unfold in unexpected ways. Mistakes need to be embraced, not covered over. New information must be constantly evaluated for impact on expected chances of success.
