Cut Your Losses

rainingmp dunleaveyAt a certain point in life, you have to confront the underperforming assets—people, investments and possessions that you stubbornly (or fearfully) hold onto, even though they no longer enrich you or your bottom line.

You know: The friends who are more trouble than they’re worth, the Netflix membership you never use but keep paying for, investments in your retirement account that are not being buoyed by the recovery (but you hope that crossing your fingers might be an effective investment strategy).

Economists call this blindspot the sunk cost fallacy. You rationalize a loss—the effort you put into the friendship, the money stashed in your 401k—by fantasizing that if you hold on, you’ll get your money’s worth.

What have researchers found? It’s smarter to take the loss—then focus on how you plan to recoup. Lesson: Let go. With money and many things in life, you can’t gain until you stop losing.

If you can get past the sports analogy, here’s an article that illustrates how the sunk cost fallacy can saddle you with more debt than value.

Some Thoughts on the Sunk Cost Fallacy