Double or nothing.
One more hand.
It doesn’t take a gambler to know that there are times when we all should walk away from a sunk cost — a deal gone increasingly sour — yet we don’t. We know we should stop playing, but are overcome by the tantalizing prospect that the next round will be the one that finally makes it all worth it.
What’s going on in our heads when we just can’t call it quits is called “escalating commitment,” and it explains both why American citizens (or at least the Bush administration) were reluctant to give up on the Iraq War, and why people lose on the game show “Deal or No Deal.”
Seriously, watch this expectant mom, Mary, lose a ton of money — at one point she could have walked away with $51,000 — on Deal or No Deal by giving in to the temptation of escalating commitment:
Escalation occurs when we compare our present value to previous, better values. Mary was offered a deal of $51,000 dollars earlier in the show. As the value of each subsequent offer decreased, Mary viewed each deal as a loss that needed to be made up, so she refused to take the money and run. She failed to consider each deal independently ($51,000 was a heck of a lot more than she had walking in the door); if she had, she could have taken the $51,000 and gone home happy.
Economics professors exploit this when they have their students do a dollar auction:
The rules are simple. The professor offers a dollar for sale to the highest bidder, with only one wrinkle: the second-highest bidder has to pay up on their losing bid as well. Several students almost always get sucked in. The first bids a penny, looking to make 99 cents. The second bids 2 cents, the third 3 cents, and so on, each feeling they have a chance at something good on the cheap. The early stages are fun, and the bidders wonder what possessed the professor to be willing to lose some money.
The problem surfaces when the bidders get up close to a dollar. After 99 cents the last vestige of profitability disappears, but the bidding continues between the two highest players. They now realize that they stand to lose no matter what, but that they can still buffer their losses by winning the dollar. They just have to outlast the other player. Following this strategy, the two hapless students usually run the bid up several dollars, turning the apparent shot at easy money into a ghastly battle of spiraling disaster.
But escalating commitment isn’t all fun and games. The author who explained the dollar continues:
Theoretically, there is no stable outcome once the dynamic gets going. The only clear limit is the exhaustion of one of the player’s total funds. In the classroom, the auction generally ends with the grudging decision of one player to “irrationally” accept the larger loss and get out of the terrible spiral. Economists call the dollar auction pattern an irrational escalation of commitment. We might also call it the war in Iraq.
America is long past the possibility of some kind of profitable outcome in Iraq. Neo-con dreams of a quick, cheap victory, delivering democracy and peace and self-financed from Iraq’s own oil revenue, got us started on this misadventure. … And like the economics class, suddenly we were in the thing up to our necks, with only bad choices available at an ever-escalating cost.
This was written in 2007.
It would seem that anything developing over this lengthy a period of time would be overridden, at some point, by superior, conscious, deliberation. We should eventually be able to convince ourselves that a bad idea is, well, bad. But research has shown that some part of the escalating commitment phenomenon can likely be attributed to our reward system; our commitment can be likened to a miniature addiction.
In yesterday’s post, I mentioned a study that showed that voters’ levels of testosterone were affected by their candidate’s success or failure in the outcome of the election. Researchers speculated that testosterone levels rising and falling in response to voting could have an effect on participants’ decision to vote in subsequent elections. And this would make sense; it’s a lot easier to walk away from a slot machine if you lose your first three rounds, but being validated with a win or two releases a set of hormones (namely, dopamine), that make us want to find reasons to keep playing.
With this in mind, it’s easy to see how so many Americans got sucked into the “stay the course; don’t cut and run” rhetoric of the Bush administration concerning Iraq. After initial success — the surge of testosterone when Saddam was toppled in 2003 — they were looking for expected, subsequent good news that was never to materialize. In doing so, they consistently failed to consider their present value (what we gained by simply pulling out then, or shortly thereafter) independently from all prior values, instead insisting on winning their proverbial dollar auction.
Like the lady on the game show, sometimes you get your $50,000 offer and you get greedy.