The Sunk Cost Fallacy
In the 1960s, the British and French governments jointly developed the Concorde supersonic jet—a revolutionary but economically doomed project. Despite knowing the aircraft would never be profitable, both governments continued pouring billions into development. When questioned, officials famously responded, “We cannot stop now, after having already spent so much.” This perfect example of the sunk cost fallacy demonstrates our powerful tendency to continue investing in losing propositions simply because we’ve already invested significant resources. From failed relationships to money-losing business projects, this cognitive trap costs individuals and organizations billions annually while causing immense emotional distress. What Exactly is the Sunk Cost Fallacy? The sunk cost fallacy occurs when we consider irrecoverable past investments when making decisions about the future. These “sunk costs”—whether financial, temporal, or emotional—should theoretically be irrelevant to rational decision-making. Yet psychologically, we find it incredibly difficult to ignore them. Classic Examples Include: Sitting through a terrible movie because “I…
Compounding Interest
Compounding Interest Albert Einstein reportedly called compound interest “the eighth wonder of the world” and “the most powerful force in the universe.” While the attribution might be apocryphal, the sentiment is mathematically sound. Compound interest is the fundamental principle behind most wealth creation, yet many people fail to harness its full power because they don’t understand how it works or start using it early enough. Compounding Interest At its simplest, compound interest means earning interest on your interest. This seemingly small distinction creates exponential growth over time, turning modest regular investments into substantial wealth. Understanding this concept is more valuable than any single investment tip or stock pick. Compounding Interest The Basic Math Compound interest differs from simple interest in one crucial way: Simple Interest: You earn interest only on your original investment. Example: $1,000 at 5% = $50 yearly interest Compound Interest: You earn interest on your original investment…