The sunk cost fallacy or why rational people make irrational choices

'Sunk cost' is a term describing an expense that cannot be recovered. The 'sunk cost fallacy' is the tendency toward keeping the commitment to an activity because we have already invested some kind of resource in it, regardless of the fact that this activity could increase our losses. It is the scientific name for the popular expression "throw good money after bad".

Let's imagine you are going to this ultra expensive French restaurant to have a diner on your special occasion. And you are told that they have the most delicious dessert on the Planet that you must try. Sure it has a ton of sugar and like a billion of calories, it is the unhealthiest meal ever and it will ruin your diet let alone your past week in gym. But it's worth it, they say. And there you go - you order the famous thing, parting with a large amount of your hard earned money. You are ready to taste it. You take a piece, bring it to your mouth and then... And then it turns out that it is just plain awful. And you start calling names this idiot that recommended it to you. But what happens next...

The logical thing is to throw the desert away. There is no use of it - why ruin your diet after you've already spent a fortune on it? Why don't you just cut the losses and move on? It is the logical thing to do. But we are not logical creatures, are we? More often than not, we are emotional creatures.

Let's look what happens on the emotional side.

You feel guilty. You just spent a big amount of money on the damn thing, you can't just get rid of it, besides - your momma told you not to throw away food. Can you imagine the people in Africa starving to death? So how do you ease your guilt?  That’s right - you eat it, although it is not the best thing to do.

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Or let's imagine that you are a manager in an organization and sponsor of an extremely costly project. You feel like the most important person in the world. But the project doesn't go so well, to say the least. It is very close to the initial deadline, but the project is nowhere near its first milestone. The budget is already spent. You will need a big amount of extra money to continue. And on top of it - the initial reason for starting the project has changed so it is questionable if this project is still relevant.

The logical thing is to reassess the situation and ultimately - to stop the project, cutting the losses.

But what the emotions say to you? Maybe they are telling you that if you stop the project, you will look like a fool in your employees' eyes. What about your superiors? And all your friends you brag about?

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These are just examples of course, to make my point. Usually the case is not so clear.

Psychologists suggest that the reason to continue could be the hope that the things will change for the better: What if the desert's taste starts to feel different after the first bite? Maybe your senses need some time to appraise the French gourmet's delicacy. And maybe that project's turning around is just behind the corner. And it will prove to be a big success.

The fallacy is that we tend to overestimate the reasons to continue, while underestimating the reasons not to.

  

I've been in the trap of the 'sunk cost fallacy' a lot of times. And also have seen this in the business and in other people decision making too.

I believe that in order to overcome the fallacy you:

            1. Have to be aware of it. Take a look at the situation, see what is going on.

            2. Be aware of the underlying emotions. Are they obscuring your mind? Are they causing you to make irrational choices? What is your motivation? Do you continue the project because it will benefit the organization or because you want to save face?

Makes sense? I hope it does.

Simplicity as a business model

"A variety of colors makes man's eye blind; a diversity of sounds makes man's ear deaf; a mixture of flavors makes man's palate dull."  Lao Tzu

Do you know what 'halo effect' is? It is psychological bias. According to Wikipedia: "the halo effect refers to a cognitive bias whereby the perception of a particular trait is influenced by the perception of the former traits in a sequence of interpretations."

Furthermore:

"In brand marketing, a halo effect is one where the perceived positive features of a particular item extend to a broader brand. It has been used to describe how the iPod has had positive effects on perceptions of Apple's other products."

Well, in a way iPod increased dramatically the interest for Apple's as a company, hence - their product's popularity. But I don't think this is the key to Apple's success. It is not the root cause - it is just an outcome of their brilliant strategy.

It is clear that quality is an essential ingredient of their recipe for success, but what I'm really interested in is: How they manage to establish a perception of exclusivity and uniqueness for everything they produce?

And the answer is: they make only 'halo' products. Simple and effective.

Take a look at the PC or mobile phones market for example - you can choose from hundreds of models which differ in every possible way. It is extremely difficult to be eminent in a market characterized with excessive variety.

But Apple doesn’t produce PCs or mobile phones. They produce Mac and iPhone. They define their own market, which motto is: 'we don't need to make hundred models, we make just ONE and we put our BEST effort in it; we make it one, but we make it count'. Does this strategy work? You tell me.

Simple and effective. It yields the coolness aura of Apple’s products.  And gives them the edge over ‘the others’. The zen way of doing business.

Beginner's mind

Zen time again.

I mentioned in a previous post the beginner's mind notion (forbidden word in zen, by the way, more on this in another post). It comes from the famous quotation by Shunryu Suzuki:


“In the beginner's mind there are many possibilities, but in the expert's mind there are few”

from his classic "Zen Mind, Beginner's Mind".

First time I read this, I thought it makes sense - I can imagine a programmer trying to convince his tech-retarded boss that what he is suggesting is a crazy idea. 


But crazy not in the cool "we can do it eventually and make a lot of money" way. More in the "I   know you're bored to death, while I'm working my ass off so that you can collect your big paycheck, but please stop wasting my time, willya?" way. (wow, long one!)

Actually it does make sense, but not the one I was thinking about. To make my point I'll tell you (actually, copy and paste you) a story:

Empty Your Cup

A university professor went to visit a famous Zen master. While the master quietly served tea, the professor talked about Zen. The master poured the visitor's cup to the brim, and then kept pouring. The professor watched the overflowing cup until he could no longer restrain himself. "It's overfull! No more will go in!" the professor blurted. "You are like this cup," the master replied, "How can I show you Zen unless you first empty your cup?"

So beginner's mind is all about 'emptying your cup' from everything that it contains - preconceptions, prejudices, knowledge, ideas; and being open to the reality as it is, in its 'suchness' (another favorite zen word). And then the expert's mind is all about having the cup full - how can you see a possibility if your mind is in chains?

That is one of the reasons why the most radical forms of zen deny the written knowledge and the learning process as we know it - because it obscures the mind with concepts, ideas and prejudices. Which is what I'm doing right now - consider this too.;)

So are you having a beginner's mind? Or you know everything beforehand?

How (im)mature an organization can be?

I've been involved with big organizations and projects for the most part of my working experience - which is not such a long period actually - around 6 years or so. Long time or not, I've seen quite a lot and some realizations emerged during the process. Yet, I'm still being continually surprised with the unbelievable heights to which inefficiency and incompetency can be brought. (I've always wanted to say this!!!) Sounds familiar? Yeah, I thought so...

Behave yourself, Yavor!!! Stop with this bad, bad criticism!!!

To put it in other words, organizations (especially big ones) have a whole lot to improve in certain areas. And let me give you an example.

Yesterday I attended a meeting at work. With several colleagues we were discussing how to improve the outcome of a task which was unsatisfactory. As the meeting developed, two approaches clashed: the 'follow the rules' approach against the 'get the work done' one. This is a situation common for the everyday work more or less everywhere - quite often the 'rules' or the 'policy' or whatever else the bureaucratic manifestation can be called, goes in the way of getting the work done. As in my particular situation: apparently the 'comply with the rules' mindset produced a negative outcome. And still - there was strong resistance against changing it.

And 'follow the rules, no matter if it makes sense' is kind of mentality that companies (and governments for that matter, but don't get me started on this one :)) try to impose on us. They are trying to limit the 'thinking' and 'creativity' and increase the 'compliance', which has the following major effects:

• on the positive side:
• makes people easier to be managed (yes, it sounds harshly, but the alternative is downright chaos)
• provides a well tested path to follow (as opposed to repeating the same mistakes again and again)
• on the negative side:
• can be used to evade personal responsibility
• the value of the people diminishes dramatically.

Considering this, I'm suggesting that organization's policy enforcement shouldn't be a means of suppressing the common sense and creativity in people. It is a framework to build on, not one to set limitations and to be a tool to evade responsibility.

And I believe that the extend to which organizations manage to successfully strike a balance between enforcing a policy and keeping people's individuality and creativity intact is a key indicator of the maturity of that organization.

Wow, that was tough one. Hope, you enjoyed it. See you soon.

Funny is the new serious!

It doesn't need to take yourself seriously to make a difference.

On inertia

According to Newton's first law - "a body at rest will remain at rest, and a body in motion will remain in motion with a constant velocity, unless acted upon by a force".

In his great book 'Mojo: How to Get It, How to Keep It, How to Get It Back if You Lose It', Marshal Goldsmith writes about inertia, which he considers to be the default response in our lives.

See any similarities? (The Newton's law is also known as 'the law of inertia'.)

I know you do. However, this doesn't mean that we can draw a conclusion on that basis. The first statement is a fact - it is a proven law of physics. The second one though, concerns life and our response to it, and this could not be further from exact science.

Anyway, I believe it to be truth. For me - it is yet another evidence that the physical and meta-physical worlds act under the same laws. Am I getting creepy here? OK, I'm stopping with the philosophical mumbo-jumbo.

So let's talk about life's inertia. The bad thing about it is that we continue doing what we are doing even if is not good for us anymore. Why? Because we are lazy, unmotivated ... or we are unaware of what is going on.

Thinking about my life lately I've found a lot of inertia, happening without my awareness. And this insight is freaking me out. Am I living or just going through life? Who is at the steering wheel? It's got to be me, right?

As usual, I'm too tough on myself, but it is worth to make some changes. Small and big ... it is all about balance, right? Let me know.

zen gift

I've been into zen for quite a while now. Particularly, I enjoy reading zen stories and koans.

If you are interested in zen, you know that there is a thing about the zen texts that makes them not easy (to say the least) to comprehend. And it is not exactly 'thinking' that unlocks the meaning.

It is a kind of mystic experience when the famous 'satori' hits you, leaving you wondering 'how come I didn't realize this earlier - it is so obvious'. It seems like the story somehow enters the subconscious and do its magic and then something happens and the wisdom comes to one's awareness.

Who knows? I don't - just guessing. In fact it is an 'uneducated' guess, but never-mind - I'm using my beginner's mind which in zen terms is a good thing (Zen Mind, Beginner's Mind).

But back to the point - here is a zen story I like.

The Gift of Insults

There once lived a great warrior. Though quite old, he still was able to defeat any challenger. His reputation extended far and wide throughout the land and many students gathered to study under him.

One day an infamous young warrior arrived at the village. He was determined to be the first man to defeat the great master. Along with his strength, he had an uncanny ability to spot and exploit any weakness in an opponent. He would wait for his opponent to make the first move, thus revealing a weakness, and then would strike with merciless force and lightning speed. No one had ever lasted with him in a match beyond the first move.

Much against the advice of his concerned students, the old master gladly accepted the young warrior's challenge. As the two squared off for battle, the young warrior began to hurl insults at the old master. He threw dirt and spit in his face. For hours he verbally assaulted him with every curse and insult known to mankind. But the old warrior merely stood there motionless and calm. Finally, the young warrior exhausted himself. Knowing he was defeated, he left feeling shamed.

Somewhat disappointed that he did not fight the insolent youth, the students gathered around the old master and questioned him. "How could you endure such an indignity? How did you drive him away?"

"If someone comes to give you a gift and you do not receive it," the master replied, "to whom does the gift belong?"

So we can refuse being involved in something if it is not good for us. We can refuse being unhappy, anxious or negative. Is that so? I don't know. But it is worth to give it a try, isn't it? Let me know.