Careful, mental commitments and attachments are OK
but some sneaky ones might trap and enslave you!
In life, 
commitments and attachments to various people, to society and to
various things and practices are essential
But they should not become our prisons, so better avoid to be trapped into
commitment biases / effects or endowment biases / effects
The commitment effect and the endowment effect, each one has a section
below, are two common species of behavioral biases that limit mentally
the decision making freedom.
commitments and attachments to various people, to society and tovarious things and practices are essential
But they should not become our prisons, so better avoid to be trapped into
commitment biases / effects or endowment biases / effects
The commitment effect and the endowment effect, each one has a section
below, are two common species of behavioral biases that limit mentally
the decision making freedom.
Among other mind conditioning symptoms, those mental traps lead to:
* Anchoring, dogmas, unfounded habits or automaticity biases.
* In plain words, stubbornness and in extreme cases, full mental slavery.
* In plain words, stubbornness and in extreme cases, full mental slavery.
The
mental persistence linked to those effects might help a person stay the course and not to float aimlessly.
But the conditions are that the goals be respectable, the commitment conscious,
the moves not wild and the person's reason still in control.
Those conditions are easily missing. People who do not master their "sticky"
attitudes may go too far, get blind to anything else than their anchor and are
prone to counterproductive decisions and behaviors.
Those biases affect notably many asset owners and
investors. This area has been largely researched, thus this article digs into it to give examples
of those flaws.
Money always raise people interest, even academic interest ;-))
A) The commitment effect / trap / bias / bait
- When you put a toe into the water, the whole body might follow.
Definition
The commitment effect usually describes how a person who makes a first small
decision or move in some direction, can get "trapped", via a series of other small
decisions or moves, to go all the way in that direction.
decision or move in some direction, can get "trapped", via a series of other small
decisions or moves, to go all the way in that direction.
The commitment sneaked into you, paralyzing your
ability to make independent decisions
This is the difference between
* a deliberate commitment
* and the commitment effect.
This trap can affect economic and financial investment decisions and behaviors,
but also various other types of current or occasional human decisions and actions.
but also various other types of current or occasional human decisions and actions.
The "first move" that triggers the trap
When somebody does something new, he / she often feels obliged (committed),
or at least is lazily resigned, to stick to that first decision, and to take other steps
in the same direction, even if it is a mistake.
People can bait themselves progressively that way.
But often, this "foot in the door" effect is the result of a
manipulation
technique used by other people.
Their trick is to convince or bait somebody into starting a task, or into doing
a little thing, which consequences seem benign at a first glance.
or at least is lazily resigned, to stick to that first decision, and to take other steps
in the same direction, even if it is a mistake.
People can bait themselves progressively that way.
But often, this "foot in the door" effect is the result of a
manipulation technique used by other people.
Their trick is to convince or bait somebody into starting a task, or into doing
a little thing, which consequences seem benign at a first glance.
The next moves (escalation)
The next step is when the person, not only does not go backwards if it is possible,
but feels obliged to
gradually go further, by climbing not only the second step,
but also the third, the fourth, and so on, and then the whole staircase...
If people do not "draw a line" they fall into this "escalation of commitment".
The most effort, hope, time, thinking and / or money somebody "invests"
in doing something, the more that person feels committed to it, gets obstinate up
to the point of obsession.
It finds it painful (here we have "cognitive dissonance") or at least hard to abandon
this behavior even if things turn bad.
This self-reinforcing phenomenon (positive feedback loop) creates a kind of addiction
and
dependence or at least an habit and a rut.
but feels obliged to
gradually go further, by climbing not only the second step, but also the third, the fourth, and so on, and then the whole staircase...
If people do not "draw a line" they fall into this "escalation of commitment".
The most effort, hope, time, thinking and / or money somebody "invests"
in doing something, the more that person feels committed to it, gets obstinate up
to the point of obsession.
It finds it painful (here we have "cognitive dissonance") or at least hard to abandon
this behavior even if things turn bad.
This self-reinforcing phenomenon (positive feedback loop) creates a kind of addiction
and
dependence or at least an habit and a rut.How bad is that effect, and is there a way out?
Useful vs. dangerous traps
Among commitments, the best as well as the worst can happen.
We have to make a difference between:
- A "normal" and conscious commitment:
During all their life, people have to take small and big commitments,
to choose sides and stick to some values whatever the risks
The contrary would be "commitment phobia", indecision, passivity,
lack of courage and pure opportunity.
To take voluntarily conscious commitments is essential to launch
and execute projects, to make things progress and to inspire trust.
to choose sides and stick to some values whatever the risks
The contrary would be "commitment phobia", indecision, passivity,
lack of courage and pure opportunity.
To take voluntarily conscious commitments is essential to launch
and execute projects, to make things progress and to inspire trust.
-
A use of commitment in gradual - positive or benign - habit-forming
It leads then to routines, which are considered necessary and beneficial.
Education for example creates commitments.
People brush their teeth because they were induced to do it a first time.
It can also be a benign habit forming, not fully rational nor questioned
but with few consequences, for example buying our groceries most
of the time in the same store without making comparisons.
Education for example creates commitments.
People brush their teeth because they were induced to do it a first time.
It can also be a benign habit forming, not fully rational nor questioned
but with few consequences, for example buying our groceries most
of the time in the same store without making comparisons.
- And the commitment trap, a highly risky behavioral bias
It starts with falsely benign actions and that makes us persevere in irrational,
addictive and counterproductive directions.
From commitment to further commitment, it gets more and more difficult
to "draw the line" and escape, until too late.
This is like the famous frog in the water which temperature is slowly raised
until boiling point.
Also drug addiction starts with a first time.
From commitment to further commitment, it gets more and more difficult
to "draw the line" and escape, until too late.
This is like the famous frog in the water which temperature is slowly raised
until boiling point.
Also drug addiction starts with a first time.
How it works in financial investment
Beware not to put your money in a mousetrap!
- The commitment effect has some similarity with the "endowment effect",
which is another bias that is explained below.
This other pernicious effect is an overvaluation of the assets we already
own making it
painful to kiss them good bye, as if they were our
own flesh.
Well, in the endowment effect there is some love for the asset, while a
commitment is a constraint, a pure bond.
Also the endowment refers mostly to economic assets while commitment
is found in most life situations.
This other pernicious effect is an overvaluation of the assets we already
own making it
painful to kiss them good bye, as if they were our own flesh.
Well, in the endowment effect there is some love for the asset, while a
commitment is a constraint, a pure bond.
Also the endowment refers mostly to economic assets while commitment
is found in most life situations.
- In case a previous investment turns bad,
the habit to hold it might have created a kind of sentimental "loss aversion".
We are reluctant to admit to have been wrong and to accept to
materialize the loss, by getting rid of the asset for example.
This is one of the factors found in the so called "prospect theory".
We are reluctant to admit to have been wrong and to accept to
materialize the loss, by getting rid of the asset for example.
This is one of the factors found in the so called "prospect theory".
- A rather related phenomenon is the sunk-cost fallacy.
that turned bad, to go on investing in it, with the purpose to "get even".
The idea is that the former investment does not cost anything any more, and at the
same time (the thing is a bit schizoid) to try not to lose what has been already
invested, even if it is not realistic than it can be recovered
There is a lack of understanding that the loss is already done, with ultra slim
chances to change that fate, and running on the contrary the risk to lose even more
by investing more.
If we take a larger economic prospective approach how many businesses became
history, just because they stuck to their past activities and / or practices.
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(owner's syndrome)
-
When our belongings are felt as parts of our heart,
-
to sell them is felt like selling our heart.
Definition
At the difference of the commitment effect, which is found in many life situations,
the endowment effect is mostly related to economic assets.
the endowment effect is mostly related to economic assets.
Well, a relation might in some cases be made with some other "possessive
emotions" or attachment biases" and "sentimental belongings".
To
put it simply, the endowment effect / trap is a rather common feeling
among owners of such assets that they are
worth more than what
the
market offers.
Somebody who owns something, tends to give it a higher monetary value than
when he did not own it.
Said even more simply, ownership increases value ...in the owner's mind.
among owners of such assets that they are
worth more than what the
market offers. Somebody who owns something, tends to give it a higher monetary value than
when he did not own it.
Said even more simply, ownership increases value ...in the owner's mind.
Investing and endowment effect
The separation drama
Many investors are reluctant to sell their financial assets whatever the price offered,as they feel that they are worth more than that price.
They also, ironically, overestimate it in comparison to the price they would be ready
to pay to acquire those assets if they did not possess them.
That aspect of "what is mine is mine" is also called, the "divestiture aversion",
the "selling aversion", the "owner's syndrome" or, on an even more affectionate
approach, the
"attachment bias".Some similar phenomenon takes place when an investor, who has - reluctantly -
sold an asset, rushes to buy another one, even if the timing to do it is wrong.
Emotionally, he feels amputated and he rushes to the transplant and prosthesis
ware store. He rationalizes his
fear by convincing himself that he should not "let the money sleeping" and should instead own again something that seems more
"tangible" than just liquid assets.
Why this "conservative" attitude?
Why to behave like a financial hen's protecting its financial chicks?
1) Status quo bias
Dislike for change
This tendency by people to overestimate what they have already, that makes them
prefer to keep it at all costs, goes further than the disposition effect or loss aversion.
Those two other notions refer specifically to a "reference
price" (see
reference point), on which somebody is
mentally anchored (either
what it considers a "good price", or a price above which it does not lose money).
Actually, the selling aversion does not refer to such a preset price but is more
related to the status quo bias, the general human reluctance to change
something in one's behavior,
2) Cognitive illusion
Without it, I would feel
poor, weak and naked.
To own an asset, or to invest in a venture, can give the illusion that it makes you
richer.
While to sell one / to divest makes you poorer, or at least put you into a less safe
position.
3) Emotional biases
The pain of separation:
no, I don't want to leave you!
This illusion is also half emotional, something related to hoarding, greed, the fear
of been deprived of something. In this sense, some people:
1) Status quo bias
Dislike for change
This tendency by people to overestimate what they have already, that makes them
prefer to keep it at all costs, goes further than the disposition effect or loss aversion.
Those two other notions refer specifically to a "reference
price" (see reference point), on which somebody is
mentally anchored (either what it considers a "good price", or a price above which it does not lose money).
Actually, the selling aversion does not refer to such a preset price but is more
related to the status quo bias, the general human reluctance to change
something in one's behavior,
2) Cognitive illusion
Without it, I would feel
poor, weak and naked.To own an asset, or to invest in a venture, can give the illusion that it makes you
richer.
While to sell one / to divest makes you poorer, or at least put you into a less safe
position.
3) Emotional biases
The pain of separation: no, I don't want to leave you!
This illusion is also half emotional, something related to hoarding, greed, the fear
of been deprived of something. In this sense, some people:
- Either idealize or give a sentimental / affective value
to some assets (their family home...),
- Or at least feel familiar with them
and thus prefer them, whatever their real prospects, to the unknown,
This is something linked to their
uncertainty aversion /
risk attitude
This is something linked to their
uncertainty aversion / risk attitude- Or, feel committed (see commitment) to what they already did,
making it hard to abandon it for a new venture.
-
They tend nostalgically to stay with their first choice,
to keep those first assets they got interested in
- Or are afraid of change (see status quo bias).
- Or are just ...lazy and see such a decision as a complication.
something, the harder to leave it.
The price of sweat.
With their hard-earned money or belongings, people tend to get overcautious.This goes to the point of neglecting to take advantage of future gain opportunities
so as not to risk to lose.
Reciprocally, their heart is less attached to money that is not theirs or that they
got easily or by chance. With it, they usually take more risks and initiatives
(nouveau riche effect, house money).
Source and further readings
See details in the Behavioral finance glossary
notably the commitment effect and endowment effect pages
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notably the commitment effect and endowment effect pages
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