Marginal thinking

One of the first thing that each student learns in business school is how to evaluate alternative investments.

It starts by ignoring sunk and fixed cost and instead calculate and make a decision based on marginal costs and revenues.

The problem with this formula is that it almost always shows that the marginal costs are lower and marginal profits are higher than the full cost.

We assume that our current assets, our current model of doing things will continue to be profitable and valuable in the future.

Except, past performance is not indicative of future results. There is no guarantee what sells today is what will sell tomorrow.

We fall into this trap of thinking in terms of marginal cost: we don’t comprehend the full cost of our actions.

And the same can be said in how we make everyday decisions. We don’t fully grasp the cost of one more cookie or to charge the credit card just this once.

We put more confidence in what we can measure instead of what we can imagine.