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Study Looks at When to Hold ‘Em, When to Fold ‘Em

By Senior News Editor
Reviewed by John M. Grohol, Psy.D. on February 9, 2011

Investment Psychology Helps People Know When to Change TacticsThe producers of the $65 million “Spider-Man: Turn off the Dark” — the most expensive Broadway musical of all time, plagued with cost overruns, cast injuries and now, bad reviews — could learn a thing or two from a new study in Psychological Science.

People often cling to bad investments, hoping that more time, effort, and money will rescue their turkey of a project. The study finds that changing people’s mindsets can make them more likely to abandon a failing investment.

“If they had at any point objectively reevaluated their position and thought, ‘What is the probability that this is going to make money?’ they might have just pulled the plug,” said co-author Dr. Daniel C. Molden of Northwestern University.

“These situations happen all the time,” he said. ”They happen with businesses, they happen in the Pentagon with weapons systems.”

Molden and graduate student Chin Ming Hui devised an experiment to find out if they could change how people dealt with the “sunk costs” from their previous investments. Volunteers were first asked to write generally about either their personal duties and obligations or their personal hopes and aspirations.

Then they were asked to imagine that they were president of an aviation company committed $10 million to building a special kind of airplane. But with $9 million already spent and the project nearly done, another company had announced they had made a better, cheaper plane. They were asked whether they would spend the last $1 million or cancel the project.

People who had thought about their hopes and aspirations were more likely to say they would abandon the project. On the other hand, people who had written about their duties and obligations felt it was their responsibility to finish the project—thus throwing good money after bad.

Molden suggests that this is because people who focus on their own hopes are thinking positively about opportunities for growth, and are therefore more likely to appreciate what else might be accomplished with the remaining $1 million, whereas people who focus on duties and obligations are feeling anxious and thinking that abandoning the project would be accepting complete failure.

“At the very least, when things start to go wrong, people should stop and evaluate the costs and benefits of going forward,” Molden said. Instead, it seems that people think, “I’ve already committed so much to this, I can’t quit now.”

Of course, not everything that appears to be going badly will fail. Buildings, movies, or government programs that run over cost could still be a success in the end. “Spider-Man” could still turn a profit (though it would apparently take more than four years).

“Things can work out,” said Molden. “The problem is that when people decide to push ahead because of what has already been invested versus some reasonable expectations of what will happen next, more often than not, they don’t.”

Source: Association for Psychological Science

 

APA Reference
Nauert, R. (2011). Study Looks at When to Hold ‘Em, When to Fold ‘Em. Psych Central. Retrieved on July 22, 2014, from http://psychcentral.com/news/2011/02/09/investment-psychology-helps-people-know-when-to-change-tactics/23322.html