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You leave the house to buy milk. Halfway we are Sunday and the market is closed. To your knowledge, there are no others in the area. But since you've been in the market for 10 minutes, the best thing to do is finish your trip, is not it?
Unless you want to stretch your legs, it is a stupid state of mind. However, curiously, this illogical cognitive pattern is common in decision-making, often involving higher risk choices.
For a poker player, it would be the same as trying to recover losses from previous rounds. What economists call the error of sunk costs ( sunk costs ). And it's a generalized behavior.
We all do it. Who has never been to the movies and stayed until the end of a movie that realized that it was bad in the first 10 minutes? It's the same logic as saying "I've already spent a lot of money on my car, I can not just get rid of it now, but better replace the gearbox that is in trouble. "
There are also those who remain in relationships who have failed for years because they do not want the time spent together to be "in vain".
What connects these examples is the fact of continuing to resort to resources (time or money) after a negative event has occurred, hoping that the situation better, when it There is no good reason to believe it. In other words, people are reluctant to accept losses, and it is much more likely that we will continue to waste time or money. money on a project that was not working, in the hope that it would prosper, rather than acknowledge defeat and give up.It's the optimism that drives the situation – and against all expectation, improvement of the situation – and aversion to failure
Even animals can be influenced by sunk costs.A recent study from the University of Minnesota in the United States revealed that rats and mice behaved in the same way as humans.
In both cases, the study showed that the longer they spend waiting for a reward for rodents, flavored ration, for humans, fun videos), the less likely they are to abandon the research before the end of the year.
According to some researchers, this pattern might suggest an evolutionary reason for this economically irrational trend. ] Trump in the hands & # 39;
At work, desperately focusing on sunk costs can have catastrophic consequences. For small businesses, this could mean, for example, postponing the dismissal of an employee who has spent several months in training, even if it was clear from the outset that it would never meet expectations . totally illogical. To think only about possible future income means not taking into account the already sunk resources already spent. "img img-responsive image-large"
After investing $ 10 million in a project that did not take off, the decision to pay an additional $ 5 million is more justified if you plan to return only 5 million USD – instead of 15 million USD (total value) But in the book Fast and Slow – Two Ways of Thinking the Nobel Prize winner Daniel Kahneman suggests that the notion of "cost" "[19659002] According to him, this is not necessarily because they are more competent than the original directors – but because the newcomers "(19659002) As a player who tries to" recover his losses "at a poker table, people trapped at an irretrievable cost claim to have no political baggage (and reluctance badociated with the acceptance of defeats and the continuation of the process. [19659002] The British Nick Leeson, which led to the bankruptcy of the Barings Ba nk in 1995, followed a similar reasoning in trying to regain his position after a series of operations.
Government Expenditure
Constantly making foolish decisions, motivated by sunk cost badysis, can lead firms to lose capital or market share and, as a result, close the door.
From another side. there are fewer mechanisms for controlling political decision-making. This certainly does not help that, all over the world, going back into resolutions is seen as a sign of weakness – by encouraging more politicians to insist on expensive projects. confirm this trend globally. Public works infrastructure is known to go beyond budgets, as in the case of the project "High Speed Rail 2" proposed by the United Kingdom
. Japan also has the habit of spending too much on infrastructure. This is one of the reasons why the country has the largest public debt in the world. Many projects offer very few tax incentives, not counting the innumerable "gateways to nowhere" in the literal and metaphorical sense.
In the United States, the "war on drugs" policy has exponentially increased the prison population. But, despite the ample evidence that the policy has not been able to control drug use (and has caused a host of terrible side effects), lawmakers are struggling to get away with it. get out.
The trap of stranded costs leads to bad choices. in the order of billions and billions of billions, but this also has an impact on personal finances – there are those who waste money by unnecessarily using the savings made, for example in repair of a good that they will not appreciate
Fight against error
The costs are therefore of considerable importance from the micro and macroeconomic point of view – for personal decisions and policies around the world. and put pressure on business leaders and political leaders to account for their actions.
But how can we avoid this trap? 9659002] "We are all sensitive to this trend," says Jim Everett, social psychologist and researcher at the University of Leiden in the Netherlands. "But we have often been able to mitigate it partially by taking a step back and thinking about alternatives."
To decide to continue an action in progress, always ask yourself: "What do I win or lose if I make a decision, and what do I win or lose if I change?" Idea? "
When in doubt, Everett recommends thinking about the entire decision-making process that has brought you where you are and considering the counterfactual scenario – in other words,
"If I could redo the same choice, would I make the same decision, if not, why not?"
Simple concept with global ramifications. And finally, let's go back to the first lesson of the game of poker.
* Madeline Grant is the Editorial Director of the Institute of Economic Affairs, a think-tank based in London.
