Hao Xuguang: Past costs have nothing to do with realistic judgments

(Source: Shanghai Securities News 2016-9-5）

When people make decisions about current or future matters, they always consider the historical costs and unrecoverable costs that occurred in the past. Once they invest money or time in something, they will show a huge tendency to continue investing. Continue current decisions inspired by previous investments. According to the standardized view of decision-making, future benefits should mainly be considered in decision-making.

Why do some people continue to invest more instead of suspending their actions once they lose money after entering the market? Sometimes you know you are wrong but you are unwilling to stop making a decision? This leads to the concepts of sunk costs and sunk w88 online casino traps.

Sunk w88 online casino (Sunk w88 online casino) refers to the w88 online casino paid by decisions that have occurred in the past and cannot be changed by any decisions now or in the future. These include investment of time, energy, money, investment, etc. The sunk w88 online casino trap is an irrational behavior in which people, once they have invested money or time in something, will show a strong tendency to continue investing. When people make decisions about current or future matters, they always consider the historical costs and unrecoverable costs incurred in the past, and continue to implement current decisions under the incentives of previous investments. According to the standardized view of decision-making, future benefits should mainly be considered in decision-making.

Famous scholarArkes and Blumer conducted a classic experiment in 1985, asking participants to answer: Suppose you spent 100 yuan to buy a ticket to go skiing in Michigan for the weekend. A few weeks later you spent $50 on another ticket to ski in Wisconsin for the weekend because you thought skiing in Wisconsin would be better. But you suddenly realize that the two tickets you bought are for the same weekend and cannot be refunded or transferred. How to choose? Among the 61 subjects, 33 chose to go to Michigan and 28 chose to go to Wisconsin. That is, 54% of the subjects gave up on the more interesting Wisconsin. The reason is that tickets in Michigan are expensive. In fact, since "you think skiing in Wisconsin will be better", more people should go to Wisconsin to ski. However, due to the sunk w88 online casino trap, more people choose the option with more expensive tickets and not necessarily "skiing will be better".

This experiment was not conducted in a real situation.Arkes and Blumer conducted another experiment in a real situation in the same year. The experiment chose season tickets for the Ohio University Theater, which include full price tickets of 15 yuan, discounted tickets of 13 yuan and 7 yuan. Question: Which group goes to the theater more? After checking the ticket stubs, w88 online casino was found that the group with 15 yuan full-price tickets saw the most theater performances. Why? The upfront investment is the most. Scholars studied data from more than 1,000 companies and found that compared with starting from scratch, those who took over mid-stream expanded the company's business more, even if the prospects deteriorated.

In bidding project quotations or auction quotations, this phenomenon often occurs. People compete to bid on popular projects or auction items with very low starting prices. In the end, the price is often several times higher than the actual value. Interviews revealed that because of the competitive atmosphere, people often think, I have bid all the way and invested so much, but if I don’t win the bid in the end, w88 online casino will be a big loss.

In short, initial investment will affect subsequent decisions, and people often stick to a certain decision despite clear evidence that w88 online casino is wrong. However, if people are fully rational when making decisions, they will consider current costs and benefits instead of past costs and benefits, because past costs have nothing to do with realistic judgments.

When an expenditure has been paid and cannot be made up, why do people make some irrational decisions, that is, why does the sunk cost trap affect people's decisions? Analyzing from the perspective of personality factors, people have the desire to avoid waste and are unwilling to accept the fact that the previously invested costs have been wasted. For example, if an investor with a paper loss does not continue to invest, w88 online casino is tantamount to admitting that the previous investment was wasted.

Arkes and Blumer conducted an experiment in 1985 to verify this conclusion. They asked subjects questions like this:

Question1: As the president of an airline company, you have invested $10 million of your company's money in a research project to develop an aircraft that cannot be detected by radar, that is, a stealth aircraft. When the project was 90% complete, another company was already selling the stealth aircraft. Furthermore, that company's aircraft appear to be superior in speed and w88 online casino to those produced by your company. Should you continue to invest the remaining 10% in projects to complete the design and manufacture of this stealth aircraft? Question 2: As the president of an airline company, your employee proposes to invest $1 million of the company's funds to fund a project to develop an aircraft that cannot be detected by radar. Yet another company is already selling stealth aircraft. And that company's aircraft seem to be superior in speed and w88 online casino. Should you invest $1 million in this project?

Result, question1: 48 subjects, 41 chose to continue; Question 2: 60 subjects, 50 chose to give up.

The author also did the same experiment in the country and distributed1428 questionnaires. As a result, Question 1: 63% chose to continue; Question 2: 65% chose to give up. In fact, if both require additional investment, the market prospects are not good and neither is competitive. The difference is that US$10 million has been invested in question 1 in the early stage. Question 2: No early investment.

The tendency to avoid regret is also a major factor in sunk costs. The expectation of regret drives people to choose to continue investing. In addition, people have the tendency to self-justify and self-validate. In order to remain consistent with past decisions and maintain a good decision-making image, w88 online casino leads to the sunk cost effect and slips into the sunk cost trap. This is also a process of self-rationalization.

w88 online casino is also important to note that people are often unwilling (consciously or unconsciously) to admit their past mistakes. Personally, admitting to a decision-making mistake is a private matter and only a matter of self-respect. In organizations, incorrect decisions will attract criticism and even criticism from colleagues or superiors. Therefore, even if subsequent decisions aggravate the original mistake, w88 online casino seems to be more psychologically balanced.

From a situational perspective, if an unsatisfactory decision will lead to severe punishment, managers will often postpone the failed project indefinitely. Although there is no result, at least they can avoid punishment. Therefore, the greater the initial investment in a project, the greater the possibility of falling into a sunk w88 online casino trap. If decision makers are responsible for the initial investment, the likelihood of slipping into a sunk w88 online casino trap is higher.

(The author is a professor at the w88 casino of Business, w88 casino, Beijing)

Original link:

http://news.cnstock.com/paper,2016-09-05,720235.htm