Source: New Scientist (UK) Contact: Authors: Peter Ayton and Hal Arkes Website: http://www.newscientist.com/ Pubdate: May 23, 1998 Editors Note: Our newshawk writes: The following article from New Scientist, although not even mentioning drugs or Prohibition, is very revealing of the psychological mechanisms which allow the continuation and even increasing of the Drug War and Drug Prohibition in spite of the quite suifficient evidence that Prohibition itself is the source of nearly all the problems for which Prohibition is instituted and maintained. CALL IT QUITS Animals know when to cut their losses, so why do we so often throw good money after bad, ask Peter Ayton and Hal Arkes HAVE YOU ever kept a failing relationship tottering along because of the heartache it's already caused you? Or eaten far too much at an "all you can eat" fixed-price buffet just to get your money's worth? Were you swayed to patriotic fever pitch by arguments that the Vietnam War or the troubles in Northern Ireland must continue because anything less than a total victory would mean that lives already lost were sacrificed in vain? If the answer to any of those questions is yes, then you too have been a victim of what psychologists call the "sunk-cost fallacy"---the human tendency to judge options according to the size of previous investments rather than the size of the expected return. Truly rational choices would be made only after weighing up future costs and benefits. Past costs and benefits are quite irrelevant. Psychologists study biases and fallacies in human thinking to get a glimpse of the hidden mental processes behind decision making. A large literature testifies both to how often humans fall for the sunkcost fallacy, and to how fascinating psychologists find it. In a study by one of us, Hal Arkes, and graduate student Catherine Blumer, theatregoers who went to buy a $15 season ticket were offered at random a normalpriced ticket or a discount of $2 or $7. All other costs and benefits of attending performances (for example, time waiting in traffic jams on the way to the theatre, or the popularity of the plays) would be about the same for each of the three groups. What's more, the patrons were unaware that the tickets had been sold at different rates. Yet those who bought tickets at either of the cheaper prices attended fewer plays during the subsequent six months than people who bought tickets at $15. Apparently, theatregoers who sink the most money into their tickets are the most motivated to attend. The judgments of professional basketball coaches are also blighted by sunk costs. They should play and keep their most productive players, but Barry Staw and Ha Hoang at the University of California in Berkeley found that players' salaries significantly affected both these decisions. The most expensive players were given more time on court and kept on the team longer than cheaper players, even after adjusting for variables such as performance, injuries and the positions they played. And it's not just sport and leisure that are riddled with irrational sunkcost decision making. Entrepreneurs who start a business are more likely to throw good money after bad than those who buy businesses that are already under way, according to a study of more than a thousand businesses conducted by Anne McCarthy at Indiana University in Bloomington. Having been personally responsible for the birth of a business makes one reluctant to give up on it even when it might be better to do so. In one of the earliest studies of the fallacy, Staw asked business school students to play the role of corporate executives who had to allocate research and development funds to divisions of their own companies. The students received feedback on their initial decisions and were then asked to make a second investment. They put significantly more money into failing investments than successful ones, and they invested even more money if they themselves were responsible for the earlier decision rather than another (unidentified) executive. That and other studies led Staw to propose that people escalate their commitment to a sunk cost in the hope of saving face by justifying their earlier decision---a sort of Nick Leeson effect. A competing explanation for the sunkcost fallacy is that future investments may seem smaller in the context of previous investments. Win or bust A third idea---and perhaps the most favoured to date---is the so-called "prospect theory". According to this argument, people are more motivated by their losses than their gains, and this results in increasingly risky behaviour as the losses accumulate. For example, long-odds bets are more popular in the last horse race of the day than the first. By the end of the day, the punters have lost most of their gambling money and hope to win it all back with a single long-shot bet that they wouldn't dream of taking in the first race. Now we believe we have an even better explanation of why supposedly rational humans fall prey to the sunk-cost fallacy. It all started with a chance remark by Oxford University zoologist Alex Kacelnik at the 1996 British Psychological Society conference called "Thinking". Kacelnik had made a passing reference to something called the "Concorde fallacy". To our astonishment, we discovered that ethologists had been studying an animal version of the sunk-cost fallacy for the past twenty years, only they called it the Concorde fallacy---named after the supersonic airliner that was financed even after it became clear that its future prospects meant it should be abandoned. Scouring the literature revealed that we weren't alone in our ignorance. Neither the researchers into animal behaviour nor the researchers of human judgment ever refer to each other's work. After an exhaustive search, we found that not one reference cited by those who study the Concorde fallacy is also cited by those who study the sunk-cost fallacy and vice versa; they are two mutually exclusive ghettos of literature, publishing in different journals and using different terminology. We also learnt that at least one prominent biologist argues pretty convincingly that, theoretically, it is impossible that animals should fall for the Concorde fallacy. This argument turned out to be a key to our understanding of the mental processes that underpin the sunk-cost effect in humans. Abandoned partners First, back a step. For ethologists, the Concorde fallacy originally arose in the context of arguments about evolution. To reproduce successfully, an animal has to accomplish various tasks such as seeking a mate, building a nest and rearing and defending its young. While performing any of these tasks, an animal will incur costs and will have to decide whether to continue with the present task or abandon it and start anew. Back in 1972, evolutionary theorist Robert Trivers of Rutgers University in Newark, New Jersey, pointed out that either member of a mated pair could exploit the other by deserting, leaving the partner to finish the job of rearing the young alone. He argued that the parent who had invested least (usually the father) would be most likely to desert. Richard Dawkins and one of his Oxford students, Tamsin Carlisle, soon spotted that Trivers's argument implied that animals should "value" options according to the extent of their prior investment rather than their future benefits. Evolutionarily speaking, that argument had to be wrong. Such a fallacy may well affect the reasoning of theoretical biologists, argued Dawkins and Carlisle, but it could not affect the actions of animals. Natural selection could only support desertion by the parent who has most to gain by deserting---regardless of who has invested most. It could not work against the prospects of effective procreation. In their article, published in 1976, the year Concorde went into service, Dawkins and Carlisle coined the term "Concorde fallacy". A few years later, Dawkins was alarmed to discover what looked like Concorde fallacy behaviour in female digger wasps. These wasps paralyse katydids---a sort of grasshopper---with a sting, and drag the bodies to their burrows. Once they have collected four or five katydids, they lay a single egg that hatches and feeds on the paralysed but still living katydids. Sometimes there's a mix-up and two wasps end up putting katydids in the same burrow. When they eventually bump into one another, they fight for the right to lay their egg in the burrow. Fights end when the loser gives up and retreats. According to observations made by Jane Brockmann of the University of Florida in Gainesville, how long the losing wasp keeps fighting depends on how many katydids she has already placed in the burrow---that is, the investment to date--- rather than the total number of katydids in the burrow. The second option would be the rational basis for such a decision because it alone dictates how much future effort the wasp must make to fully stock its larder. When Dawkins and Brockmann put their heads together, they came up with another explanation for the wasps' apparently irrational behaviour. Plainly each wasp knows how many katydids she placed in her burrow because that dictates how long she fights. (She probably doesn't actually count the number of katydids, but assesses it indirectly, perhaps by sensing how much time she spent flying back and forth from the burrow.) She is, however, unable to tell whether another wasp is stashing katydids in her burrow until she meets her rival, so it's probably safe to say that she has trouble counting the total number of katydids that are there. As the wasp cannot be said to be ignoring information she does not have access to, she can hardly be held to be committing a fallacy. The two researchers concluded that the number of katydids each wasp puts in its burrow is simply the best estimate of the burrow's future worth. In that case, it makes sense for a wasp to fight longer the more katydids it has put in. But not everyone has been swayed by Dawkins's arguments that animals should not commit the Concorde fallacy. In fact, since Dawkins first published on the subject, claims of such behaviour have been popping up all over. We scrutinised those reports, and in each case we found alternative explanations for the animals' seemingly irrational behaviour. For example, according to a study by Robert Lavery at Queen's University at Kingston, Ontario, cichlid fish that have had three previous broods defend their current brood more aggressively against a fake predator than those protecting their first brood. In his 1995 report in Behavioral Ecology and Sociobiology (vol 36, p 193), Lavery favoured the idea that the fish were exhibiting the Concorde fallacy---those that had made the largest investment increased their expenditure in terms of aggression. But Lavery also acknowledged that prior investment could be a good indicator of future reward if the past efforts reduce the fish's ability to procreate in the future. In that case, aggression that could put the fish's life in jeopardy would become "cheaper" because fewer potential future broods would be at risk. The fish would be quite rational to defend its later broods more aggressively. Similarly, Patrick Weatherhead at Carleton University in Ottawa has found that Savannah sparrows defend their nests ever more aggressively as the brood hatches and grows. Once again, Weatherhead suggests that this is Concorde fallacy behaviour. But once again, there is an alternative explanation: with time, not only does past investment increase, but also the future cost of brood-rearing diminishes. Consequently, you could just as easily argue that the future benefit to cost ratio of the sparrow's defensive behaviour increases with brood development. Once again, the behaviour is entirely rational. In fact, just as Dawkins might have predicted, we found that every one of the dozen or so reports of Concorde fallacy behaviour in animals could be attributed to the reasoning of the researchers as they struggle to tease apart past investment and future benefit, or fail to adequately take into account the fact that sunk costs can sometimes predict future benefits. There are several other studies which show that animals as cognitively humble as ducks, blackbirds and mice make perfectly rational decisions on the basis of the expected future benefit, not past investment. House mouse mothers, for example, protect small litters less aggressively than bigger ones, even when they have started out investing resources in a larger litter which has then been reduced in size. Spilt milk So why are people less rational than animals? We are products of evolution too, so why do we alone appear to find it so difficult to resist the sunk-cost fallacy? First of all, for humans as for animals, sunk costs may occasionally predict future benefits, although this certainly isn't the case with the examples of sunk-cost reasoning that psychologists study. We would argue that in these cases, the explanation lies with the human brain's unique ability to make up and apply abstract rules: "wise" generalisable rules that can often be expressed proverbially such as "No use crying over spilt milk", "A stitch in time saves nine", and "Don't put the cart before the horse". Abstract rules and generalisations have enabled humans to respond effectively to an enormously wide range of situations, but they can also catch us out if we overgeneralise. More than child's play Take the rule "Waste not, want not". If that is applied to a situation where investing more in an attempt not to "waste" a previous investment does not produce greater benefits, the sunk-cost fallacy emerges. Lower animals lack the intellectual capacity to create abstract rules, let alone overgeneralise them, and can only respond using instincts or simple learnt behaviours. Neither could lead to Concorde-type reasoning. If the sunk-cost fallacy is a by-product of abstract thought then you might expect younger children to be less susceptible to it than adults and older children. And that's exactly what happens. At the European Association for Decision Making conference in Leeds, in August 1997, economic psychologist Paul Webley reported that in a group of five-year-old children, those who had been asked to imagine that they had bought and then lost a fairground ticket were no more likely to say that they would buy another one than those who had not been asked to imagine the loss of a ticket. By contrast, eight-year-olds who were asked to imagine that they had lost a ticket were more likely to say they would buy another one. So next time you fall prey to the sunk-cost fallacy and find yourself making entirely illogical decisions about how to invest your money, affection or time, you can at least take some comfort from this: it's the price you pay for being smart enough to reason abstractly. ....... Peter Ayton is a reader in psychology at City University, London, and a member of the European Association for Decision Making. Hal Arkes is professor of psychology at Ohio University and a past president of the Society for Judgment and Decision Making Further Reading: "The Psychology of Waste" by H .R. Arkes, Journal Of Behavioral Decision Making, vol 9, p 213 (1996). "Quasi-rational Economics" by R H. Thaler, Russell Sage Foundation, New York, 1991 "Parental Investment, Mate Desertion and a Fallacy" by R. Dawkins and T. R. Carlisle, Nature, vol 262, p 131 (1976) "The road to Desert Storm" by R Lipshitz, Organization Studies, vol 16, p 243 (1995) - --- Checked-by: "R. Lake"