Business Psychology - Latest Findings

Article No. 231
Business Practice Findings, by James Larsen, Ph.D.

Good Money After Bad

Research reveals three ways to correct the urge to risk too much.

There's a problem that afflicts business owners: the tendency to risk too much. It is a pervasive tendency, and Marcel Zeelenberg, from the University of Amsterdam, recently tested a way to help business owners overcome it.

That's good news, but let's begin by letting you feel the problem.

Imagine that you have weekend plans with your family to drive 60 miles to attend a special event. You've got the tickets in your hand, and they weren't cheap. Everyone is excited, but just as you're about to leave, it starts to snow - hard. You're tempted to leave anyway, and it's a strong urge. This is the kind of risk-taking tendency Zeelenberg investigated.

Do you think the urge to risk the winter trip would be as strong if you'd won these tickets in a radio station promotion?

Most people would answer "no." The difference has to do with your stake in the tickets. When you're the one who has purchased them, you feel compelled to follow a course of action that has greater risks than if this stake were missing - when you're not the one who bought the tickets.

This difference is crucial in Zeelenberg's research.

Business people call this tendency "throwing good money after bad." It occurs when an investment takes a turn for the worse, and a further investment offers only a slim hope for a complete turn around. The initial investment looks inevitably lost, but the additional investment looks like a reasonable risk when it isn't at all, and any objective person could recognize it. Of course there often aren't any objective people around when you really need them.

Working with 182 college students, Zeelenberg began with an exercise that demonstrated a risky response, then he introduced his three corrections one at a time. Each correction worked. Each correction wiped out the increased risk taking in the students with whom he experimented.

His first correction was to call the students' attention to the time and effort that had gone into the person's situation in addition to the financial investment.

His second correction was to ask the question: "What outcome would you really like to see at this point?"

His third correction was to call attention to the regret a person would feel if the additional investment would also be lost.

The first correction, calling attention to a person's time and effort already invested in a course of action, stops the urge to risk too much by stimulating a sense of protection. People guard their time and energy and want to be paid for their work. People who gain something without working for it value it less and are more willing to gamble, so reminding a person of this time and effort investment wipes out the urge to risk too much.

The second correction, calling attention to outcomes people actually desire, forces people to look more realistically at their position and recognize other desirable outcomes. In the situation of a losing investment, recovering an investment and getting out is often an option people don't actively pursue, opting instead for the more difficult and risky choice of pursing the initial plan, even though it has displayed a distressing appetite to take all the time and money you're willing to sacrifice to it.

The third correction, calling attention to regret, reminds a person that the future will soon become the present, and he/she will learn the outcome of choices made today. Regret is a very real possibility if risky choices go bad, and the experience of regret is dreaded. When the students were reminded of it, their urge to risk too much disappeared.

Now, think back to situations in which you've thrown good money after bad and imagine introducing Zeelenberg's corrections. Do you suppose they might have helped? Similar situations will likely arise again, but you'll be ready next time.

Reference: Zeelenberg, Marcel, and Eric van Dijk (1997) A Reverse Sunk Cost Effect in Risky Decision making: Sometimes We have too much Invested to Gambol. Journal of Economic Psychology, 18 (1997), 677-691.

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