It’s much harder to envision what you use money for in the future. You know that actually money are used for bills and expenses and trips, but those are all abstract business, career and personal needs and they don’t come to mind with success without prompting. So, even for an entrepreneur, money seem to be worth much less the future than it is in the present.
An acceleration frame changes how people think in business and career
But how can you minimize this effect for business, career and from an entrepreneur’s perspective? Well, the answer is simple: Change the frame! Change your business frame! Change your career frame! And, change your entrepreneur frame if you want success! Instead of thinking about your business and career decisions as a delay, think about it in terms of acceleration to success. Think as an entrepreneur!
Say, you have an investment in a business opportunity that will return $11,000 in two years. You have the option of sacrificing $1,000 of your investment to cash in with success. Now what do you do? Remember, you might be an entrepreneur and early success is vital. This acceleration frame changes how people think.
Decision frames that call attention to our path also influence our business decisions
People report thinking more concrete thoughts about the future of their business and about how they use money as entrepreneurs. In turn they become much more patient they now know that they’ll need the money in the future and they don’t want to take the sure loss of $1000. Decision frames that call attention to our path also influence our decisions even when they shouldn’t.
Now, suppose you spent $100 a ticket to play. The day before the play you receive an invitation to a friend’s party and you know that you’d enjoy the party more than the play but you call your friend and the client. You say that you’re going to show that evening and you’ve already bought your ticket. Most people understand this business scenario. The final decision seems perfectly reasonable: you go to the show because you’ve already bought your ticket and you don’t want to waste your money.
Past actions influence your business decisions today
This seems like the right decision for any business person or entrepreneurs. But there’s actually an inconsistency here. It’s called the sunk cost fallacy, and if you are successful you probably avoided this throughout your investment and business career. And, you can understand this fallacy by thinking about some alternative scenarios.
Suppose that you were simultaneously offered to consume the play and invited to go to the party. If you prefer to go to the party you turned down the tickets and just go. So the fact that you paid for the ticket in the past influences your business decision today. Now, the price of the ticket is what economists call a sunk cost, it’s money it’s already been spent.
Past benefits and costs are just that in the past, but they still influence our business decisions
Some costs are endemic to government spending politicians love to refer to what is already been spent when justifying an expensive program, but that money is already gone and it shouldn’t affect analysis of the viability of the program going forward. To be consistent over time we should only make decisions based on the future benefits compared with future costs.
Past benefits and costs are just that in the past, but they still influence our decisions. The behavioral economists Richard Thaler explains the sunk cost fallacy in terms of what he calls mental accounting, when we engage in a transaction like buying a ticket to a play we open a mental account for that purchase and we close that account when the transaction is completed.
Avoid the sunk cost fallacy if you want to be a successful entrepreneur
So if we buy tickets for a play and then don’t go it seems like we’ve lost the money in that account and we don’t think about the other opportunities that we missed. The key idea of mental accounting is that we tend to think about individual decisions that we want to make each of those decisions pay off on its own. We let, therefore the past influence our present which may be against our own interests
But, we can adopt a different frame for decisions. Don’t think about whether you made a good decision when buying tickets for the play, that’s in the past. Think about whether you want to go to the play or to the party, those are in your future. Excluding past events from your decision frame can help you avoid the sunk cost fallacy and also help you make better decisions about your future.