#commitment bias

[valuestox-blog]

New Post has been published on UNDERVALUED STOCKS

New Post has been published on https://www.undervaluedstocks.info/commitment-bias/

Commitment bias

People do not like being regarded by others as inconsistent.  When a person commits publicly to a particular point of view, commitment bias likely will exert a powerful influence on subsequent beliefs and behavior.

Commitment bias reflects the tendency of people to have their current and future beliefs remain consistent with their past beliefs.  To be inconsistent now with one’s past implies that earlier beliefs were wrong either in part or in total.  Being wrong is a threat to one’s sense of self-worth.

There are many examples of inconsistency creating problems for people. The more someone changes their point of view, the less trustworthy they seem.  For example, politicians have lost elections for having inconsistent views over time.

The greater the commitment, the more urgent the desire to remain consistent.  A privately held belief does not trigger commitment bias as strongly as a belief boldly proclaimed to the public.  A weakly held belief does not influence the mind as much as a strongly held belief.

It is easy to see how commitment bias could cause trouble for investors. Investing involves making high-stakes decisions under uncertain conditions.  Putting money to work in an investment creates an immediate commitment to the thought processes that led to the investment decision. The commitment will make it more difficult to determine the best time to sell and move on to another opportunity.

A possible cure to commitment bias is to remember the words widely attributed to John Maynard Keynes.  Supposedly, someone once confronted Mr. Keynes that he had changed his mind regarding some matter, to which Mr. Keynes allegedly replied, “When the facts change, I change my mind.  What do you do, sir?”

In short, recognize that new information may warrant new beliefs and give yourself permission to adjust accordingly.

[cowryconsulting-blog]

businesses BEhaving

Have you ever tried to get out of a gym membership that you don’t use?

You’re not alone. The Office for Fair Trading was concerned that gym contracts were exploiting people’s optimistic view of their future selves and tendency to overestimate their gym use. Some gyms were tying customers into contracts for three years, and if they wanted to terminate their contract any sooner, they would have to pay all remaining fees. Following an investigation, the High Court ruled that the minimum length contract across a range of gyms were both unfair and unenforceable.

Since then, we’ve seen an emergence of gyms operating a ‘pay as you go’ system. These gyms are using their understanding of behavioural economics to restore customers’ trust in the industry and to treat customers fairly.

We love the new pay-as-you-go hipster gym in Liverpool Street, 1Rebel, who use one of the most powerful insights from behavioural economics, commitment bias, to get customers returning. Their brick wall acts as a tangible driver to get fitness bunnies to commit to sessions.

Operating a pay-as-you-go system can be a risky strategy but giving customers chalk to write their fitness goal on the wall and completing a tally underneath every time they workout, increases the likelihood of them going back.

This is due to the fact that customers can easily see their progress and research has shown that  if we have already made some progress towards a goal, we are more likely to complete that goal, a phenomenon referred to as the goal-gradient effect.

[back-to-louis]

Escalation of commitment refers to a pattern of behavior in which an individual or group will continue to rationalize their decisions, actions, and investments when faced with increasingly negative outcomes rather than alter their course. The related term sunk cost fallacy has been used by economists and behavioral scientists to describe the phenomenon where people justify increased investment of money, time, lives, etc. in a decision, based on the cumulative prior investment ("sunk costs"), despite new evidence suggesting that the cost, beginning immediately, of continuing the decision outweighs the expected benefit. These decisions are irrational in their current context but in alignment with decisions and actions previously made, and they can be influenced by a variety of determinants and contexts. The dilemmas leading up to such decisions usually involve the prior choices no longer working or causing personal or group losses. While there are options to either cease current actions or continue on with them, neither has clear outcomes or is the obvious choice. Escalation of commitment then occurs when persistence is chosen over withdrawal. The term describes poor decision-making in business, politics, and gambling and is frequently used in psychology and sociology. In the latter, it is also referred to as "irrational escalation", "irrational escalation of commitment" or "commitment bias". Examples of this are frequently seen when parties engage in a bidding war; the bidders can end up paying much more than the object is worth to justify the initial expenses associated with bidding (such as research), as well as part of a competitive instinct. The phenomenon and the sentiment underlying it are reflected in such proverbial images as "Throwing good money after bad" or "In for a penny, in for a pound".

Escalation of Commitment, Wikipedia

[jamreilly]

Decision Making

the term sunk cost fallacy has been used to describe the phenomenon where people justify increased investment in a decision, based on the cumulative prior investment, despite new evidence suggesting that the cost, starting today, of continuing the decision outweighs the expected benefit. Such investment may include money, time, or even — in the case of military strategy — human lives. The phenomenon and the sentiment underlying it are reflected in such proverbial images as "Throwing good money after bad"

Additionally, "irrational escalation" (sometimes referred to as "irrational escalation of commitment" or "commitment bias") is a term frequently used in psychology and sociology to refer to a situation in which people can make irrational decisions based upon rational decisions in the past or to justify actions already taken. 

 sunk cost fallacy