Friday, August 26, 2011

A revision...and my AHA moment!

So yesterday I was talking about welfare and as I thought about it last night, I was grouping everyone into two categories (the lazy folks and the people using it to better themselves) when in all actuality there is another group that benefits from state help. That is the elderly/disabled/etc folks that are in the best situation they can be in and just need a little extra help. And it makes me sad when I see someone in this category who applies and gets denied because they aren't a family or they do get approved but only for $20 a month in food stamps or something like that. So as an edit, there are things I would change about the system for NOT approving people who are just using, but also things I would change to give those people who ARE in need a chance to get approved.
Anywho. Enough about welfare.

I had an AHA moment at school on Wednesday and wanted to share. I didn't quite understand what Microeconomics was when I started the class, and for those of you who don't know it is the study of how/why an individual or a small group of people make their decisions. My AHA moment came when we were talking about cost. More specifically, sunken cost.

In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered.   -Wikipedia

So as an example, if you were to buy stock at $100 and 2 years later it's value had dropped to $80, should you buy it? Sell it? Cry cause it lost value? My train of thought was well geez I invested $100 and now I've lost $20. I'd be mad that I lost that money. So then my professor says you CANNOT focus on that $100. It is a sunken cost. My initial reaction was "I can too....I paid that money and I will focus on that $100." But then he made me realize something. That $100 is never truly coming back. Yes that particular stock could increase in value or decrease in value, but that $100 check/cash/card I gave will not be returned to me. So why was I trying to focus on it so much? Instead...the focus needs to be on prospective cost or opportunity cost.

The prospective cost is what is going on, or what will eventually happen.
The opportunity cost is the best alternative foregone, or the sacrifice related to the second best choice.

So what does this all have to do with my AHA moment? I wasn't even thinking about money or stock or finance...I was thinking about my life. Instead of focusing on my sunken costs (past decisions, etc that I cannot take back) I need to start from where I am at and look at the prospective cost and opportunity cost. No more letting those sunken costs get in the way...its time to look at my decisions from right now. Now sometimes its good to look at the sunken costs to keep yourself rational, but it shouldn't have a huge weight on your decision. Your decision should be made based what you want for your future and the risks or sacrifices that will be made in order to get that result.

Reading back, I don't know that this will make any sense to anyone else but it made quite the impression on me. Its just hard to articulate my thoughts sometimes but hopefully you get the point.

Anyway....its FRIDAY! I hope ya'll have a great weekend!


  1. I got it - and very well written :) Don't you love school!?! :)