Problem Management — principles
History

Everyone knows the importance of understanding the trends of history, whether of countries, organizations, or individuals. Being able to predict future behaviour is the essence of success.

But some people tend to attach a sentimental value to historical information, often resulting in poor decision making.

In an economics question you are told Retailer A has in inventory 7 widgets that he bought at $12 each, 5 widgets at $8, and 3 at $11, while Retailer B has 4 at $13, 3 at $8, and 6 at $11. Each retailer needs to have 25 widgets in stock. and asked to calculate the unit cost that each dealer would use when determining the selling price if the wholesaler currently offers widgets at $9 each.

If you paid attention to any number other than the $9 current wholesale cost, you have assigned sentimental value to the existing stock. It really doesn't matter whether the retailer paid a fortune for it or inherited it from his uncle; the only economically relevant value is what it costs to replace the inventory today.

Similarly when looking at stock shares, you should consider what price you could sell it for today and what price you think you would get next week or month or year if you hold onto it until then. The original price you paid for it is totally irrelevant. It doesn't matter that you bought it at four times the current price; if you believe the price is going to go down, sell it now. It doesn't matter that you bought it for a fraction of its current price; if you believe that the price is going to go up, hold onto it. Looking back at what you paid for it will make you think that selling at a loss is bad or that selling at a profit is good. The real criteria, good or bad, can be found only by looking at today and estimating the future; the past has already happened.

To see this better, suppose you give the problem to someone else, using only today's values and future estimates, and ask them to make a decision. (E.g. shares currently sell at $10 each, but you think that next week they will sell for $12 (or $8).)

After they have told you to hold for a week (or sell now), let them know the historical values and ask how that affects their answers. They will wonder why you are telling them and will reply that the historical values are obviously irrelevant to the given situation.

Similarly, stop a chess game in the middle and show it to expert chess players. They will study the current situation and analyze possible directions that the game might move in, but (unless they happen to be curious) they won't ask or even wonder how the pieces got into their current configuration, as that historical information will have no effect whatsoever on any future outcome.

Consider the Let's Make A Deal game show. Three prizes, one good and two bad, are hidden behind curtains and the contestant chooses one. Monty Hall then opens one of the unchosen curtains revealing a bad prize, and asks the contestant if they want to change their choice. Many contestants remain with their original choice (sentimental value) even though changing would double their chances of getting the good prize.

This sentimental principle applies to things other than money. For instance, suppose a current project is not going well, or management decides to make major changes to it. In order to decide what to do next, you should of course look only at where you are now and where you want to end up, but it is very difficult not to think of all the money, time, and effort that has already gone into the project. That one person has spent the last two months working on something should be totally irrelevant to the decision; if it's faster and cheaper to throw the work away and start again, that's exactly what you should do.