On Bad Investments and Marathons

This week, The New York Times launched Upshot , described as “a plainspoken guide to the news” and in essence, similar to two other explanatory new sites that have recently launched (Vox.com and FiveThirtyEight.com). My favorite piece so far on Upshot is Justin Wolfers’s “What Good Marathons and Bad Investments Have in Common” (because it combines two of my interests: finance and running):

In the usual analysis, economists suggest it’s worth putting in effort as long as the marginal benefit from doing so exceeds the corresponding marginal cost of that effort. The fact that so many people think it worth the effort to run a 2:59 or 3:59 marathon rather than a 3:01 or 4:01 suggests that achieving goals brings a psychological benefit, and that missing them yields the costly sting of failure.

But in other domains, this discontinuity between meeting a goal and being forced to confront a loss can lead to bad economic decisions. Because losses are psychologically painful, we sometimes strain too hard to avoid them.

For instance, when you sell your house, your goal may be to get at least what you paid for it. But this simple goal has led to disastrous decisions for those who bought homes in Florida or Nevada during the housing bubble. Too many homeowners set their selling prices with an eye on recouping past investments rather than on current market conditions, and as a result, their homes didn’t sell, deepening their financial distress.

Well worth the read in entirety.

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