Thursday, July 23, 2015

lessons from an ipod, sunk costs and the psychology of losses and gains


I first noticed my ipod was missing from the drawer when I was heading off to the gym. At this stage the expected loss (EL) was negligible because the probability of loss was low. The expected loss is the probability of the loss multiplied by the value, which in this instance was about £50.

When I returned from the gym, I searched my other draws, and also my various pockets, but still nothing. The EL had gone up to about £15 based on a 30% probability of loss. I was still fairly confident of finding the ipod in my car.

When I next used my car, the ipod was not to be found. The EL jumped up to about £45. This is where the pain of the loss bites, where instead of getting frustrated one takes a stoical approach and tries to quickly view the loss as a sunk cost. The probability of finding the ipod from this point on was close to negligible. I thought of the decent innings we had, and bid the device a mental farewell.
 
A few days later I went for a long drive and found the ipod under the car seat. Voila, as I'd completely written off the ipod, it's reappearance was a windfall gain.

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