However, there are some basic concepts from Economics 101 that are wonderfully useful in everyday life, and seem to be horribly under-utilzed.

Today’s concept is that of Sunk Costs –  Sunk costs are costs that have already occurred and cannot be recovered.  Economic theory tells us that rational people do not consider sunk costs when making a decison about what to do next.  The rational thing to do is to consider what the best decison to make today is, taking the sunk costs as given.

This has many applications in real life, and I have to admit, I almost never see anyone properly put sunk costs out of their mind, when indeed it would be beneficial for them to do so.

Improper and common ways that “irrational” (normal) people consider sunk costs:

•  Staying in an unsatisfying relationship because of the “history” the couple has shared.
•  Spending more money on a bad project because money has previously been spent on it. I see this one in software development all the time.
•  Making dangerously large bets or trades in an attempt to “get back to even”.
• Averaging down on a trade – another countertrend trading concept that is really just a fluffy way of saying throwing good money after bad.
•  ”Letting yourself go” — not caring about gaining weight because you are already overweight.

These are all scenarios where we can benefit from taking a step back and observing the situation in a detached and logical way.  Accept that life has brought you to this present moment with a set of circumstances or baggage which is a given, and cannot be changed.  All you can do is make the best decision to improve yourself or your situation going forward.  It does you no good to complain about the cards that life has dealt you.  You must play your hand to the best of your ability.

 

The Carnival of Investing – Super Bowl Edition was published today and included a link to EdMamula.com…this link drove some traffic to this my site and resulted in $1.26 worth of ad revenue.  That made me HAPPIER.  I’m sure we all have experienced similar things.  It’s a bit like driving that extra mile to save 2 cents per gallon on gasoline.  Of course, ask anyone who has taken Economics 101, and they will tell you that yesterday’s winning trade should make me 1476 clicks happy…somehow, the emotional mathematics just don’t work that way.   AND, for fun, I’ll go ahead and donate that $1.26 to the Hunger Task Force…let the economists figure THAT one out.

Based on this information, however, exercising appears to be a negative sum game. 

Let’s look at the numbers…

If I expect to live another 40 years, then exercising 30 minutes a day will cost me :

 3.5 hours a week
 182 hours a year
 7280 hours over the next 40 years

Let’s make some further assumptions:
 
 I’d like to maximize the amount of time in my WAKING life, and my sole purpose for exercise is to extend my life expectancy.

 Excercising for 7280 waking hours should extend my life by 1.1 years or 9636 hours…ah, but let’s be conservative and say I’ll sleep for 6 hours each night… in that case, I’ll extend my waking life by a mere 7227 hours.  I can extend my waking, non-exercising life by a few days by immediately suspending my workout program and spending that time on the couch watching American Idol.

Furthermore, I value money, and my gym membership costs me roughly $500 a year or $20,000 over the course of 40 years (presuming no rate increases…ha!) Maybe I should wait until I’m 50 and start exercising then.  If I can still add 1.1 years, exercise becomes a positive sum game.

Are you convinced?  I sure hope not!  Exercise provides many additional benefits that maximize the quality of my waking life, but cannot be quantified per se.  This view of exercise as a negative sum game is similar to viewing the forex market as a zero-sum game and not considering the positive externalities that result from the marketplace’s function as a risk transfer mechanism.