Education

In for a Penny, In for a Pound

penny Pound

Why is it that even after losing three rows of poker, a gambler still sits for the fourth? On an extended front, why is it that investors do not withdraw their money from what is evidently a terrible investment? Or, why is it that political leaders of clearly losing sides continue war even after it is draining resources and weakening the nation? Is there a reason why so many of us believe in the idea of ‘in for a penny, in for a pound’?
The human tendency of sticking to decisions even when they result in mass losses, known as escalation of commitment, is uncannily common, and is practiced by almost every one of us in our lifetime. When looked at from an objective perspective, the gaping logical rift is so obvious, it makes it difficult for us to comprehend why anyone would commit to a bad decision. However, one must realize the amount of initiative, responsibility and resources that is devoted when a decision is made, which makes it considerably difficult to pull out of it nonchalantly.
Every decision is made keeping in mind a particular form of favorable outcome that it is going to yield. Following this, when initial losses are incurred, one sticks to the decision for rational reasons. They are seen as temporary setbacks, that is quite usual in scenarios when people are starting off or have just made a particular decision. Besides the costs associated with withdrawing in the early stages before a particular decision is even given the chance to succeed is often high, and does not make much financial sense. Consider the example of the political leader of a losing nation in a war. Accepting defeat and calling of the entire war after losing one or two battles right at the onset seems ridiculous for two reasons. Firstly, the wastage of resources, including time, effort and money that have gone into the war. And more importantly, the idea that one or two losses are not decisive for an entire war, and may just be temporary setbacks.
It is a little later that the commitment to a decision becomes problematic. When losses continue to mount, psychological factors come into play, that begin steering away from rationality. It is largely dominated by our attitude of being reluctant to admit our mistakes. In most situations, there are two broad stakeholders to any decision one makes- foremost is the person who makes the decision, and other than that are secondary people who are involved in the decision, or are somehow affected by it. Generally, escalation of commitment to a bad decision is to ineffectively soothe both stakeholders. The person making the decision sticks to it, despite losses, both, in an attempt of self- justification and to maintain an image of reliability amongst her secondary stakeholders. To continue with the example used above, a political leader feels the need to maintain her persona of a leader who cares about the well-being of her nation and citizens. In such a scenario, withdrawing from war reflects badly on this image because it shows her as a leader who has made a mistake and lost valuable resources for a lost cause. Besides this, psychologically, she also feels the need to justify to herself that the decision she took was right.
In later stages of a decision with continuing losses, several other factors prevent withdrawing commitment. These include agencies of external pressures, from the political and social fronts, who did not initially take a decision, but went along with it for too long. Since they have now an extended role and responsibility to play, they prevent the initial decision maker to simply withdraw. In case of war, it would include allies of the losing nation, or particular sections of the society in the population who believe in the cause of the war, that prevent the political leader from withdrawing even if he wants to.
While the example discussed substantively herein is of greater complexity, the technical mechanisms of the escalation of commitment apply to simple decision dilemmas as well. For instance, take the case of a gambler who commits to a poker game even after losing three rounds because she believes she is good at it and is supported by luck. She also has to maintain her image of a skilled and expert gambler. By her eighth round, she has to put at stake money belonging to third parties, and following this — even if she is losing and wants to withdraw — she cannot, because the third parties force her to continue.
The escalation of commitment to bad decisions is something we all indulge in, and can have dangerous consequences. It is something that should categorically be avoided and can be prevented by using alternate mechanisms to make decisions. One such mechanism would be to split the responsibility associated with making particular decisions- if several people are held accountable for one decision, it is easier because one person is not overwhelmed with anxiety regarding the consequences of losses. Another way would be to allocate a particular amount of money for every decision, i.e. an upper limit beyond which losses incurred from a particular decision will not be accommodated, and it will automatically have to be abandoned.

Clear cognitive approaches, with rational and reasoned thinking can help us succeed in making decisions wisely, and more importantly teach us when we must withdraw from a bad one. After all, there is no sense in forgoing both the penny and the pound when we can prevent it.

– Contributed by Tinka

Picture Credits: wisegeek.com



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