Motley Fool Hidden Gems Investing - “The rest of your life begins now.”

Episode Date: October 6, 2020

Ever buy a ticket to something, not enjoy yourself, and stay anyway? Sunk costs can be a powerful force, but Professor Richard Nisbett says the smarter move is to resist them and walk out.   Learn more about your ad choices. Visit megaphone.fm/adchoices

With The Motley Fool Money Extra, I'm Chris Hill. You're probably not familiar with Richard Nisbet and his work, but Malcolm Gladwell is. Nisbet is a social psychology professor at the University of Michigan, and Gladwell once called Nisbet the most influential thinker of his lifetime. A few years ago, I talked with Professor Nisbet about the principle of sunk costs. It's something that investors deal with, but it's also something we encounter as consumers. The idea that if you buy a ticket to something and you're not enjoying yourself, you stick with it because, hey, you paid good money for that ticket. It's understandable to think that way, but it's probably not the right decision.

I think few of us walk out of movies at all. And economists would say so much the worse for us. economists, I should say, I've studied how economists actually make decisions in everyday life, and they are a different species from the rest of us. I mean, they do walk out of movies. They do leave expensive meals uneaten. They abandon projects that they spend a tremendous amount of time on. They cut bait. And let me give an example of what's a kind of sunk cost trap that most of us are going to be so likely to fall into. Suppose you bought a ticket for a basketball game a month ago. You paid $100 for it. Tonight's not a game, but the star is not playing.

Nothing hangs on the outcome of the game. It started to rain cats and dogs, and you have to walk six blocks to the subway. You're going to say, gee, do I really want to do that? But there's a compelling feeling you don't want to waste that $100. And the economist says, honk, wrong. You can't waste that $100. You don't have it anymore. You're framing the problem wrong.

And the economist's motto, which is very freeing, I think, is the rest of my life begins now I mean, you can't get that money back You can pay twice You can pay once for the ticket and once for sitting there watching a boring game And that's why they walk away from things they put a lot of time, energy, or money into And they're right about that If you want more insights from the good professor check out his book, Mindware, Tools for Smart Thinking.

I'm Chris Hill. Thanks for listening. We'll see you next time.