Sunday, November 22, 2009

Persevere, But Avoid the Sunk Cost Fallacy

The Sunk Cost Fallacy is the tendency to "throw good money after bad", especially when the alternative is to admit that you made a mistake. In one experiment, subjects were asked to role-play managers who either were or were not responsible for initial funding:

"Under high personal responsibility conditions, subjects allocated an average of 11.08 million dollars to the corporate divisions they had earlier chosen for extra R & D funding. Under low personal responsibility conditions, subjects allocated an additional 8.89 million dollars to the corporate divisions previously chosen by another financial officer." -Knee-Deep in the Big Muddy
The great thing about this experiment is that the high-responsibility subjects were only role-playing managers who had made a set of initial investments (which were actually determined by the researchers), and yet still felt the need to save face and defend their fictitious past investments.

The main effect of the sunk cost fallacy is to encourage further investment in projects, especially ones you feel personal responsibility for. A side-effect is to raise your probability estimate that the project will succeed (which can result in a state of denial over a failing project).

On the one hand, you want to avoid the sunk cost fallacy. On the other hand, you do want to exhibit the minor personality trait of grit (perseverance):
"Grit did not relate positively to IQ but was highly correlated with Big Five Conscientiousness. Grit nonetheless demonstrated incremental predictive validity of success measures over and beyond IQ and conscientiousness. Collectively, these findings suggest that the achievement of difficult goals entails not only talent but also the sustained and focused application of talent over time." -Grit: Perseverance and Passion for Long-Term Goals

Perseverance seems helpful in the technical arena:
"..the higher the overall perseverance scores of patent inventors, the higher their annual earnings." -Are perseverance and self-efficacy costless?
My advice is to persevere, but to focus your perseverance especially powerfully on the projects that have the greatest possibility of success. For example, you should (within reason) persevere on a promising company you own based on the amount of future profits you expect, regardless of whether you founded or bought the company, and regardless of how much or how little you've invested in it so far.



Every link in this article is broken except for ;_;

Rolf Nelson

Fixed the links and changed a bunch of them to now that DOI is standardized.