The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion
by Luke L. Wiley
Chapter 10The Sunk-Cost Bias and Pride and Regret
Jacobian Inverse: If I have decided to build a plane and I’ve sunk $100 million into a $2 billion project, come hell or high water I’m going to build this plane, no matter what. Even if my closest competitor beats me to the market, charges less, and builds a better plane, I will still see it through; after all, I’ve already spent $100 million on it. I cannot be willing to look at my investment position with a fresh pair of eyes; rather, I will maintain the same course of action no matter what.
If I want to make good investment decisions, I need to be objective and dispassionate. In order to ensure I don’t do that, I should make decisions based on emotional attachment, pride, and stubbornness. I am simply unwilling to let go and move on.
Let’s walk through a scenario. Let’s say I’m an airplane manufacturer and I’ve decided to build the plane that will make the Dreamliner look like a rowboat. I’ve crunched the numbers and come to the conclusion that the potential revenue from such a plane is roughly $2 billion. Airlines and oligarchs all over the world are clamoring for my new plane. A rough sketch was leaked on the Internet, and, overnight, the phones started ringing. The only problem? I have to build it.
So I gather my engineers, aeronautics experts, and manufacturing team, and we begin planning, designing, and building the plane. It has everything—a floor reserved for parents flying with children, a pet hotel for travelers who ...