Thinking About Malinvestment

Often, we spend time and money on things that don't work out: unnecessary purchases, bad hires, poor investments, and wasted energy.

This type of error is called malinvestment - "bad" or "poor" investment. The meaning of bad/poor is variable, but it's almost always tied up with a feeling along the lines of "that was dumb… what a waste of money!"

Malinvestment is very, very common. You can't see the future, and that uncertainty introduces a significant risk of error whenever you make a purchase or investment of time and energy.

It's easy to feel bad about malinvestment - making mistakes is never fun. Feeling too bad, however, is a form of Hindsight Bias: if you knew then what you know now, you wouldn't have done what you did.

Don't worry: you're not stupid, you're not irrational, and you're not alone.

There are many useful ways to think about malinvestment. Here are a few…

Malinvestment as Error

Sometimes, malinvestment looks like a straightforward mistake: an error. You thought the investment was promising, wise, or prudent, and it turns out it wasn't. This usually takes the form of:

  • Buying stuff you don't use.
  • Purchasing a product that doesn't work or malfunctions.
  • Changing preferences, needs, or priorities in a way that makes past investments obsolete.

These errors often come from not having enough information before making a purchase decision. You can often prevent these types of errors by:

  • Collecting more information before you invest.
  • Being more diligent about evaluating needs and priorities before investing.
  • Investing only to solve a clear, present, recurring, immediate, or important need or problem.

Even so, you're bound to make a few errors. In that case, the best approach is to try to capture residual value from the expenditure. (E.g. selling old items online.) If that's not possible, wise, or cost-effective, it's best to cut your losses and move on.

(Businesses can also prevent this from becoming a Barrier to Purchase by using Risk Reversal - by transferring the risk of purchase to you, customers almost always are more willing to purchase.)

Malinvestment as Inefficiency

Other forms of malinvestment look like inefficiency - an unnecessary waste of resources. This usually takes the form of:

  • Paying insurance premiums without incident.
  • Building and maintaining backup systems and Fail-Safes you never need to use.

It's important to realize that this type of malinvestment is very common when dealing with uncertainty and risk. Paying insurance premiums is usually a wise thing to do if you're not able or willing to mitigate certain common or large risks.

If you don't end up collecting a claim on the insurance, your premiums weren't really "wasted," in the sense that you were paying to mitigate a very real risk. You certainly would've saved money if you could see the future, but you can't. Paying to mitigate major risks is a good decision as long as you don't overpay for the insurance.

Malinvestment as Tuition

When you're trying to do something new or different, you're bound to make a few mistakes. Investing time, energy, or effort in something that doesn't work out the way you hoped is almost a certainty:

  • Starting to do something in a certain way, only to find out it won't work.
  • Doing something one way, then discovering a better way when you're almost done.
  • Breaking something important, then having to fix it.

In these cases, the malinvestment is simply a form of tuition - it's the price you're paying to learn more about the topic. As long as the tuition costs aren't too steep, a certain amount of error can teach you a lot about what's important, what works, and what not to do in the future.

So, in a way, this type of malinvestment makes you smart, savvy, and better prepared for the future. That's not so bad, is it?

Malinvestment as Experimentation

Sometimes, it's even wise to seek out a certain level of malinvestment as a form of experimentation.

This is particularly important when it comes to acquiring new skills. One of the most significant barriers I hear from readers who check out The First 20 Hours is this:

"How do I know whether I've deconstructed the skill in the best possible way?"

"How do I know that my approach is the fastest approach I can take?"

"What if there are even better ways to learn that I'm not yet aware of?"

Here's the answer: you'll never have all the information, and you'll never find the "optimal" or "perfect" strategy before you begin. If you wait until you're 100% certain you've found the best possible approach before you start… you'll never start.

The real question is: how quickly can you start making mistakes? The faster you jump in and start trying to do what you want to be able to do, the faster you'll learn - mistakes and all.

Sure, you'll make a few mistakes. Sure, you might learn of other promising approaches. Sure, you'll wonder at some point if your errors could've been avoided.

In the end, it doesn't really matter. Being willing to make a few mistakes makes it much, much, much easier to get started.

When in doubt, err on the side of imperfect experimentation.

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Published: March 14, 2014Last updated: March 14, 2014

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