Fallacy where you already invested so much

McGraw-Hill Irwin. Human Relations. Springer Berlin.

What is a Logical Fallacy?

The Misconception: You make rational decisions based on the future value of objects, investments and experiences. The Truth : Your decisions are tainted by the emotional investments you accumulate, and the more you invest in something the harder it becomes to abandon it. You can learn a lot about dealing with loss from a video game called Farmville. You have probably heard of this game. Inone in five Facebook users had a Farmville account.

This bank … a lot of money on launching new online services this year. Central Bank always … interest rates when inflation goes up. The overdraft … by the bank two days ago. He … lots of good financial advice to his clients since he started work for us. As an analyst, you need to be good at statistics because you … a lot of time working on tables and spreadsheets. He admitted …the contract without checking all financial details first. Have you considered … in a small online business?

The Misconception: You make rational decisions based on the future value of objects, investments and experiences. The Truth : Your decisions are tainted by the emotional investments you accumulate, and the more you invest in something the harder it becomes to abandon it. You can learn a lot about dealing with loss from a video game called Farmville.

You have probably heard of this game. Inone in five Facebook users had a Farmville account. The barrage of updates generated by the game annoyed other users so much it forced the social network to change how users sent messages. At its peak, 84 million people played it, a number greater than the population of Italy. Farmville has shrunk since. About 50 million people were still playing in early — still impressive considering the fantasy megagame World of Fallacy where you already invested so much boasts about a quarter as many players.

So, it must be really, really fun. A game with this many players must promise potent, unadulterated joy, right? Actually, the lasting appeal of Farmville has little to do with fun. To understand why people commit to this game and what it can teach you about the addictive nature of investment, you must first understand how your fear of loss leads to the sunk cost fallacy.

Kahneman explains that since all decisions involve uncertainty about the future the human brain you use to make decisions has evolved an automatic and unconscious system for judging how to proceed when a potential for loss arises. Kahneman says organisms that placed more urgency on avoiding threats than they did on maximizing opportunities were more likely to pass on their genes. So, over time, the prospect of losses has become a more powerful motivator on your behavior than the promise of gains.

When offered a chance to accept or reject a gamble, most people refuse to make take a bet unless the possible payoff is around double the potential loss.

Behavioral economist Dan Ariely adds a fascinating twist to loss aversion in his book, Predictably Irrational. He writes that when factoring the costs of any exchange, you tend to focus more on what you may lose in the bargain than on what you stand to gain. In one of his experiments, Ariely set up a booth in a well-trafficked area. The majority of people who faced this offer chose the truffles.

It was a fine deal considering the quality differences and the normal prices of both items. Ariely then set up another booth with the same two choices but lowered the price by one cent each, thus making the kisses cost nothing and the truffles cost 14 cents.

This time, the vast majority of people selected the kisses instead of the truffles. If people acted on pure mathematical logic, explained Ariely, there should have been no change in the behavior of the subjects.

The price difference was the. Your loss aversion system is always vigilant, waiting on standby to keep you from giving up more than you can afford to spare, so you calculate the balance between cost and reward whenever possible. When anything is offered free of charge, Ariely believes your loss aversion system remains inactive. This is why marketing and good salesmanship is often all about convincing you what you want to buy is worth more than what you must pay for it.

You see something as a good value when you predict the pain of loss will be offset by your joy of gain. Emotionally, you will come out ahead. Unless you are buying something just to show others how much money you can burn, you avoid cringing when you fork over your earnings.

When you lose something permanently, it hurts. The drive to mitigate this negative emotion leads to strange behaviors. Have you ever gone to see a movie only to realize within 15 minutes or so you are watching one of the worst films ever made, but you sat through it anyway? Maybe you once bought non-refundable tickets to a concert, and when the night arrived you felt sick, or tired, or hung. Perhaps something more appealing was happening at the same time. What about that time you made it back home with a bag of tacos, and after the first bite you suspected they might have been filled with salsa-infused dog food, but you ate them anyway not wanting to waste both money and food?

Sunk costs are a favorite subject of economists. Simply put, they are payments or investments which can never be recovered. An android with fully functioning logic circuits would never make a decision which took sunk costs into account, but you.

You know a loss lingers and grows in your mind, becoming larger in your history than it was when you first felt it. Whenever this clinging to the past becomes a factor in making decisions about your future, you run the risk of being derailed by the sunk cost fallacy. Hal Arkes and Catehrine Blumer created an experiment in which demonstrated your tendency to go fuzzy when sunk costs come.

Over half of the people in the study went with the more expensive trip. It may not have promised to be as fun, but the loss seemed greater. The fallacy prevents you from realizing the best choice is to do whatever promises the better experience in the future, not which negates the feeling of loss in the past. Kahneman and Tversky also conducted an experiment to demonstrate the sunk cost fallacy. See how you do with this one. Would you still buy a ticket? You probably. Would you go back and buy another ticket?

Maybe, but it would hurt a lot. In the experiment, 54 percent of people said they would not. The situation is the exact. It seems as if the money was assigned to a specific purpose and then lost, and loss sucks. This is why Farmville is so addictive people have lost their jobs over it. Farmville is a valuable tool for understanding your weakness in the face of loss. The sunk cost fallacy is the engine which keeps Farmville running, and the developers behind Farmville know. Farmville is free, and the first time you log on you are transported to a netherworld patch of grass where you float above an abeyant young farmhand eager to get to work.

His or her will is your will, and his or her world is empty save a patch of land ready to be plowed and a crop of vegetables ready to be picked. Wading into the experience, you feel the game designers have made every attempt to turn your head toward the screen in a way which brings no attention to the grip on your scalp. It is all your choice, they seem to be saying, no one is forcing you to proceed. Here, harvest these beans. Hey, why not plant some seed?

Oh, look, you could plow a patch of land, you know, if you want. A loading bar appears and then quickly fills as you watch your grinning Aryan-ish avatar with his messy-on-purpose haircut virtually dirty his digital overalls.

The cheery music, which sounds like the cyborg interpretation of clumsily extracted memories from the brain of a reanimated Old West piano player, drones on and on.

The moment the loop restarts is difficult to pinpoint. Once you learn you must wait at least an hour or so to continue, you start clicking around and find you have coins and cash which can be spent on trees, plants, seeds, an impressive bestiary of jaunty fantastical creatures and a bevy of clothes, devices, buildings and props. If you stay vigilant, checking back throughout the day to see how close your strawberries are to being ripe or if a wandering animal has visited your feed trough, you can earn more virtual currency and advance in levels and unlock more stuff.

This is the powerful force behind Farmville. Playing Farmville is a commitment to a virtual life form. Your neglect has consequences. You must return, sometimes days later, to reap the reward of the time and virtual money you are spending.

To stave off these feelings you can pay Farmville real-world money or participate in offers from their advertisers to negate the need to tend to certain things, reverse the death of crops and expand your farm ahead of schedule. You can also ask your friends to help, since the game has tendrils reaching deep into Facebook. Although all these strategies will keep the fallacies at bay for a few days, they also feed.

The urge to stay the course and keep your farm flourishing gets more powerful the more you invest in it, the more you ask others for help, the more time you spend thinking about it. People set alarms to wake up in the middle of the night to keep their farm alive. You continue to play Farmville not to have fun, but to avoid negative emotions. You return and click to patch cracks in a dam holding back something icky in your mind — the sense you wasted something you can never get.

To say Farmville has been successful is a silly sort of understatement. It has led to the creation of a whole new genre of entertainment.

Hundreds of millions of dollars are being generated by social gaming, and like so many profitable businesses, someone is hedging their bets against a predicable weakness in your behavior in order to turn a profit. Farmville players are mired in a pit of sunk costs. You may not play Farmville, but there is probably something similar in your life. It could be a degree you want to change, or a career you want to escape, or a relationship you know is rotten.

Laid out like this, logical and rational and easy to pick apart, you can pat yourself on the back for being such a reasonable human. When something is gone forever it can be difficult to realize it. What is left behind is just as irretrievable. Sunk costs drive wars, push up prices in auctions and keep failed political policies alive. The fallacy makes you finish the meal when you are already. It fills your home with things you no longer want or use. The sunk cost fallacy is sometimes called the Concorde fallacy when describing it as an escalation of commitment.

It is a reference to the construction of the first commercial supersonic airliner. The project was predicted to be a failure early on; but everyone involved kept going.

It is a noble and exclusively human proclivity, the desire to persevere, the will to stay the course — studies show lower animals and small children do not commit this fallacy.

They can only see immediate losses and gains.

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Hal Arkes and Catehrine Blumer created an experiment in which demonstrated your tendency to go fuzzy when sunk costs fallacy where you already invested so much. Cable News Network, 26 Oct. To say Farmville has been successful is a silly sort of understatement. Share on Tumblr. What they found was that people who were about to place a bet rated the chance that their horse would win at an average of 3. When offered a chance to accept or reject a gamble, most people refuse to make take a bet unless the possible payoff is around double the potential loss. You can learn a lot about dealing with loss from a video game called Farmville.