The Hospital Site and the Sunk Cost Fallacy
There has been a determination to press on with the Kensington Place / Gloucester Street hospital site despite plans being turned down twice, and it is only know that the pendulum seems to be swinging away.
So why is there so much resistance and reluctance to look at other sites, or at other companies (like the French company) to build the hospital?
I think that we are seeing here a very common psychological trait, which is called “the Sunk Cost Fallacy” or “the Sunk Cost Effect”. It is when previously invested resources – time, money, effort – bias judgement as to what to do next.
A good description comes in Arkes, Hal R., and Peter Ayton. “The Sunk Cost and Concorde Effects: Are Humans Less Rational than Lower Animals?” Psychological Bulletin 125.5 (1999): 591-600:
“The sunk cost effect is a maladaptive economic behaviour that is manifested in a greater tendency to continue an endeavour once an investment in money, effort, or time has been made (Arkes & Blumer, 1985). A prior investment should not influence one's consideration of current options; only the incremental costs and benefits of the current options should influence one's decision. Nevertheless, several researchers have shown that people do attend to prior investments as they consider what course of action to take.”
David McRaney, a writer for “Psychology Today”, on his blog “You are not so smart”, looks at how the mind works, or rather misfires, in making judgments that fail to be rational:
“In psychologist Daniel Kahneman’s book, Thinking Fast and Slow, he writes about how he and his colleague Amos Tversky through their work in the 1970s and ‘80s uncovered the imbalance between losses and gains in your mind. Kahneman explains that since all decisions involve uncertainty about the future the human brain you use to make decisions has evolved an automatic and unconscious system for judging how to proceed when a potential for loss arises.
There has been a determination to press on with the Kensington Place / Gloucester Street hospital site despite plans being turned down twice, and it is only know that the pendulum seems to be swinging away.
So why is there so much resistance and reluctance to look at other sites, or at other companies (like the French company) to build the hospital?
I think that we are seeing here a very common psychological trait, which is called “the Sunk Cost Fallacy” or “the Sunk Cost Effect”. It is when previously invested resources – time, money, effort – bias judgement as to what to do next.
A good description comes in Arkes, Hal R., and Peter Ayton. “The Sunk Cost and Concorde Effects: Are Humans Less Rational than Lower Animals?” Psychological Bulletin 125.5 (1999): 591-600:
“The sunk cost effect is a maladaptive economic behaviour that is manifested in a greater tendency to continue an endeavour once an investment in money, effort, or time has been made (Arkes & Blumer, 1985). A prior investment should not influence one's consideration of current options; only the incremental costs and benefits of the current options should influence one's decision. Nevertheless, several researchers have shown that people do attend to prior investments as they consider what course of action to take.”
David McRaney, a writer for “Psychology Today”, on his blog “You are not so smart”, looks at how the mind works, or rather misfires, in making judgments that fail to be rational:
“In psychologist Daniel Kahneman’s book, Thinking Fast and Slow, he writes about how he and his colleague Amos Tversky through their work in the 1970s and ‘80s uncovered the imbalance between losses and gains in your mind. Kahneman explains that since all decisions involve uncertainty about the future the human brain you use to make decisions has evolved an automatic and unconscious system for judging how to proceed when a potential for loss arises.
"Kahneman says organisms that placed more urgency on avoiding threats than they did on maximizing opportunities were more likely to pass on their genes. So, over time, the prospect of losses has become a more powerful motivator on your behaviour than the promise of gains. Whenever possible, you try to avoid losses of any kind, and when comparing losses to gains you don’t treat them equally.”
“Behavioural economist Dan Ariely adds a fascinating twist to loss aversion in his book, Predictably Irrational. He writes that when factoring the costs of any exchange, you tend to focus more on what you may lose in the bargain than on what you stand to gain. The “pain of paying,” as he puts it, arises whenever you must give up anything you own. The precise amount doesn’t matter at first. You’ll feel the pain no matter what price you must pay, and it will influence your decisions and behaviours.”
“When you lose something permanently, it hurts. The drive to mitigate this negative emotion leads to strange behaviours. Have you ever gone to see a movie only to realize within 15 minutes or so you are watching one of the worst films ever made, but you sat through it anyway? You didn’t want to waste the money, so you slid back in your chair and suffered. Maybe you once bought non-refundable tickets to a concert, and when the night arrived you felt sick, or tired, or hung over. Perhaps something more appealing was happening at the same time. You still went, even though you didn’t want to, in order to justify spending money you knew you could never get back.”
And it is this thought of wasting all that time, investment of resources and funding which is certainly affecting the hospital debate. The focus is on the loss rather than on the gain, or the possible delays, on the write off of plans and costs, and the tendency of human beings, because of the sunk cost fallacy, is to believe that just one more push can get you there and you can win the war.
Instead, you are just digging yourself into a deeper hole.
There’s a fascinating experiment created by Hal Arkes and Catherine Blumer in 1985 which demonstrated your tendency to go fuzzy when sunk costs come along. David McRaney explains:
“They asked subjects to assume they had spent $100 on a ticket for a ski trip in Michigan, but soon after found a better ski trip in Wisconsin for $50 and bought a ticket for this trip too. They then asked the people in the study to imagine they learned the two trips overlapped and the tickets couldn’t be refunded or resold. Which one do you think they chose, the $100 good vacation, or the $50 great one?”
“Over half of the people in the study went with the more expensive trip. It may not have promised to be as fun, but the loss seemed greater. That’s the fallacy at work, because the money is gone no matter what. You can’t get it back. The fallacy prevents you from realizing the best choice is to do whatever promises the better experience in the future, not which negates the feeling of loss in the past.”
And this is surely the case with the hospital site: politicians need to realise that the best choice is to do whatever promises the better experience in the future, not which negates the feeling of loss in the past.
Gloria R. Burthold in “Psychology of Decision Making in Legal, Health Care and Science Settings” explains how scientific thinking works, and in contrast, how the sociological processes work, often to the detriment of factual science:
“The scientific ideal is a relatively simple iterative process of observation, hypothesis development and hypothesis testing producing new evidence and debate leading to conclusions that are increasingly refined and reliable and cover more situations though are never certain.”
“By contrast, the sociological process of the diffusion of new beliefs is more complex. This sociological process often involves power struggles in which all sides of the debate claim that their old opinion is supported by the best evidence, but overlooking flaws in evidence that supports their opinions whilst discounting evidence that does not. Demosthenes once said that “Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true” . It is normal to wish to be proven to have been right all along and that wish can blind us to the reality that we were wrong from the start.”
And of course, that we have seen played out with the hospital debate – a power struggle between different groups, those who think the Kensington place site is unviable, and those who still stick to their opinion that it is the best site for a cost effective and quickest built hospital.
After the first plans were turned down, Senator Andrew Green simply shrugged his shoulders and commissioned new plans which addressed some, but not all, and not significant issues. There didn’t really seem to be any indication of critical thought. Instead, a survey was commissioned which showed that two in three respondents said that rather than delaying the project any further, work should continue on developing the General Hospital plot. He proclaimed that was a “powerful mandate”. It was, but it was a powerful mandate for showing how readily people buy into the sunk cost fallacy.
“The survey revealed that opinion about the location is divided, with 51% agreeing that the new hospital should be built on the current site, while 47% disagreed. However, a third of the 47% of people who disagreed with building on the current site said that it was better to build there than delay any further.”
This time constraint has derailed critical thinking about the site, as can be seen how the evenly divided group in the survey of 1,000 (1% of the Island population) came down on the town site in order to get it done as soon as possible.
The prospect of endless delays in planning applications being submitted and then turned down does not seem to have been a factor. Instead there seems to be an indication that the mindset is to keep trying – regardless of delays – until plans get through. And yet that has already caused delays not counted in the original timetable, and which are just dismissed.
David McRaney concludes with this point:
“Sunk costs drive wars, push up prices in auctions and keep failed political policies alive. The fallacy makes you finish the meal when you are already full. It fills your home with things you no longer want or use. Every garage sale is a funeral for someone’s sunk costs.”
“As an adult human being, you have the gift of reflection and regret. You can predict a future place where you must admit your efforts were in vain, your losses permanent, and when you accept the truth it is going to hurt.”
It now looks as if the States may be on the point of admitting that the efforts put into the Town site must be written off, and a new site chosen, and new plans submitted. That seems like a backward step – but that’s the sunken cost fallacy whispering into our ears.
References
Ariely, D. (2009). Predictably irrational, revised and expanded edition: The hidden forces that shape our decisions.
Arkes, Hal R., and Peter Ayton. “The Sunk Cost and Concorde Effects: Are Humans Less Rational than Lower Animals?” Psychological Bulletin 125.5 (1999): 591-600
Burthold, G. R. (2008). Psychology of decision making in legal, health care and science settings. Gardners Books.
https://youarenotsosmart.com/2011/03/25/the-sunk-cost-fallacy/
“Behavioural economist Dan Ariely adds a fascinating twist to loss aversion in his book, Predictably Irrational. He writes that when factoring the costs of any exchange, you tend to focus more on what you may lose in the bargain than on what you stand to gain. The “pain of paying,” as he puts it, arises whenever you must give up anything you own. The precise amount doesn’t matter at first. You’ll feel the pain no matter what price you must pay, and it will influence your decisions and behaviours.”
“When you lose something permanently, it hurts. The drive to mitigate this negative emotion leads to strange behaviours. Have you ever gone to see a movie only to realize within 15 minutes or so you are watching one of the worst films ever made, but you sat through it anyway? You didn’t want to waste the money, so you slid back in your chair and suffered. Maybe you once bought non-refundable tickets to a concert, and when the night arrived you felt sick, or tired, or hung over. Perhaps something more appealing was happening at the same time. You still went, even though you didn’t want to, in order to justify spending money you knew you could never get back.”
And it is this thought of wasting all that time, investment of resources and funding which is certainly affecting the hospital debate. The focus is on the loss rather than on the gain, or the possible delays, on the write off of plans and costs, and the tendency of human beings, because of the sunk cost fallacy, is to believe that just one more push can get you there and you can win the war.
Instead, you are just digging yourself into a deeper hole.
There’s a fascinating experiment created by Hal Arkes and Catherine Blumer in 1985 which demonstrated your tendency to go fuzzy when sunk costs come along. David McRaney explains:
“They asked subjects to assume they had spent $100 on a ticket for a ski trip in Michigan, but soon after found a better ski trip in Wisconsin for $50 and bought a ticket for this trip too. They then asked the people in the study to imagine they learned the two trips overlapped and the tickets couldn’t be refunded or resold. Which one do you think they chose, the $100 good vacation, or the $50 great one?”
“Over half of the people in the study went with the more expensive trip. It may not have promised to be as fun, but the loss seemed greater. That’s the fallacy at work, because the money is gone no matter what. You can’t get it back. The fallacy prevents you from realizing the best choice is to do whatever promises the better experience in the future, not which negates the feeling of loss in the past.”
And this is surely the case with the hospital site: politicians need to realise that the best choice is to do whatever promises the better experience in the future, not which negates the feeling of loss in the past.
Gloria R. Burthold in “Psychology of Decision Making in Legal, Health Care and Science Settings” explains how scientific thinking works, and in contrast, how the sociological processes work, often to the detriment of factual science:
“The scientific ideal is a relatively simple iterative process of observation, hypothesis development and hypothesis testing producing new evidence and debate leading to conclusions that are increasingly refined and reliable and cover more situations though are never certain.”
“By contrast, the sociological process of the diffusion of new beliefs is more complex. This sociological process often involves power struggles in which all sides of the debate claim that their old opinion is supported by the best evidence, but overlooking flaws in evidence that supports their opinions whilst discounting evidence that does not. Demosthenes once said that “Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true” . It is normal to wish to be proven to have been right all along and that wish can blind us to the reality that we were wrong from the start.”
And of course, that we have seen played out with the hospital debate – a power struggle between different groups, those who think the Kensington place site is unviable, and those who still stick to their opinion that it is the best site for a cost effective and quickest built hospital.
After the first plans were turned down, Senator Andrew Green simply shrugged his shoulders and commissioned new plans which addressed some, but not all, and not significant issues. There didn’t really seem to be any indication of critical thought. Instead, a survey was commissioned which showed that two in three respondents said that rather than delaying the project any further, work should continue on developing the General Hospital plot. He proclaimed that was a “powerful mandate”. It was, but it was a powerful mandate for showing how readily people buy into the sunk cost fallacy.
“The survey revealed that opinion about the location is divided, with 51% agreeing that the new hospital should be built on the current site, while 47% disagreed. However, a third of the 47% of people who disagreed with building on the current site said that it was better to build there than delay any further.”
This time constraint has derailed critical thinking about the site, as can be seen how the evenly divided group in the survey of 1,000 (1% of the Island population) came down on the town site in order to get it done as soon as possible.
The prospect of endless delays in planning applications being submitted and then turned down does not seem to have been a factor. Instead there seems to be an indication that the mindset is to keep trying – regardless of delays – until plans get through. And yet that has already caused delays not counted in the original timetable, and which are just dismissed.
David McRaney concludes with this point:
“Sunk costs drive wars, push up prices in auctions and keep failed political policies alive. The fallacy makes you finish the meal when you are already full. It fills your home with things you no longer want or use. Every garage sale is a funeral for someone’s sunk costs.”
“As an adult human being, you have the gift of reflection and regret. You can predict a future place where you must admit your efforts were in vain, your losses permanent, and when you accept the truth it is going to hurt.”
It now looks as if the States may be on the point of admitting that the efforts put into the Town site must be written off, and a new site chosen, and new plans submitted. That seems like a backward step – but that’s the sunken cost fallacy whispering into our ears.
References
Ariely, D. (2009). Predictably irrational, revised and expanded edition: The hidden forces that shape our decisions.
Arkes, Hal R., and Peter Ayton. “The Sunk Cost and Concorde Effects: Are Humans Less Rational than Lower Animals?” Psychological Bulletin 125.5 (1999): 591-600
Burthold, G. R. (2008). Psychology of decision making in legal, health care and science settings. Gardners Books.
https://youarenotsosmart.com/2011/03/25/the-sunk-cost-fallacy/
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1 comment:
Could not have put it better myself! As an ex-compulsive gambler (now, thankfully, 22 years clear but still paying the price for those years of profligacy and waste) I'm thoroughly au fait with the concept of 'chasing one's losses' which, until recently at least, appeared to be the guiding philosophy behind much of States thinking governing the Future Hospital project. My view is simple: this is a massive, once-in-several-generations undertaking, so let us do whatever it takes to get it right - even if that means writing off circa $40 million and resorting to a virtual tabula rasa.
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