Behavioral finance FAQ / Glossary (Commitment)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Commitment effect



00/12i - 03/3i,8i + see foot on
the door, loss aversion,
endowment,
disposition effect, prospect theory,
habit, addiction, sunk cost + bfdef2

Where you put a toe, the whole body might follow.

Definition:

The commitment effect describes how a person who makes a first small decision
in some direction
, can get "trapped", via a series of other small decisions, to go
all the way in that direction
.

This habit-forming trap can affect,
among other kinds of human decisions and behaviors,

economic and financial investment decisions and behaviors.

The "first move" that triggers the trap

It does not seem to commit you at first.

And then it creates an habit.

When somebody

For example

Does something new

Investing in a stock
he / she never
owned before.

Later he / she often feels obliged (committed) or at least
lazily resigned
even when he/she has no fundamental reason,
to act as shown below:

Stick to that first decision

Keeping the stock.

Sometimes go further, climb a

second step, a third, then the whole staircase.

Buying more of it.

The bait

Come to papa!


People can bait themselves progressively into a dubious, or virtuous, or
even pervert commitment that follows the above described process.

This can be self inflicted, but this "foot in the door"
effect (see that phrase) is sometimes a lure /
manipulation technique used by other people.

The trick here is to convince or bait somebody into starting a
    task, or doing a little thing,
which consequences seem benign at a
    first glance
.

Once the victim has accepted to take the first step, he/she feels usually
   committed
to go on with the task.

That makes it easier to convince that person to climb the next steps,
until he/she gets completely hooked.

How the rope tightens:
     the escalation of commitment

When resignation turns into
stubbornness, obsession and addiction.


In the longer run, if people do not "draw a line" they fall into the "escalation
of commitment", a spiral in which they commit more and more efforts,
time and money.

The more somebody "invests" in something, the more
that
person feels committed to it.
It can become an obsession.

As an "addict", that person clings stubbornly to it or at least it finds
it hard (even painful: see cognitive dissonance) to abandon it, even if
things turn bad.

This self-reinforcing phenomenon (positive feedback loop) creates thus a

kind of dependence / addiction, or at least an habit and rut.

How it works in financial investment

Beware that your money is not in a mousetrap!


Even in general life situations, when people commit to a project, and put
efforts n trying to reach it, the term (personal) "investment" is used.

In this respect investment can qualify as well monetary investment as
deeper mental involvement.

This combination might explain for example:

How corporations that have invested heavily in an activity,
   equipment and technology can miss economic evolutions and lose
   ground.

also why some scientists don't accept new paradigms.

No wonder that when it comes to financial investment, specific aspects
that are related to commitment intervene:

The commitment effect has some similarity with the "endowment
    effect"
(see that phrase),

This effect is an overvaluation of what we possess
already
, making it hard to kiss good bye to this asset and to
invest in some other belonging that might be worthier.

Well, some love for the asset is involved, while commitment
is a constraint, a pure bond.


In the case a previous investment turned bad, the habit has created

a kind of sentimental "loss aversion".

This is a reluctance to admit to have been wrong and to get rid of 
the asset to materialize the loss.

This is one of the factors found in the prospect theory (see those
words).


A rather related phenomenon is the sunk-cost fallacy.

It is the biased rationale that incites, after having invested in
something that
turned bad, to go on investing in it.

The idea is that the former investment does not cost anything now,
and at the same time (this is a bit schizoid) that what has been
already invested should not be abandoned even if it is unrealistic
that it can be recovered ("get even bias / get-eventis", see that
phrase).

To feel less pain about the loss, the person does not admit
that it is already done, with ultra slim chances to change that fate.

He/she runs on the contrary the risk to lose even more by
investing more.

Investing in real options: does it create a commitment?

A business or an investor might be wise to put a small amount of
money and efforts in a new venture or investment, just to get some
experience
in a field that seems promising.

This (paying) sample tasting is called "buying a real option".

But is it not a foot in the door?

Certainly it can create a commitment effect if some precautions are
not taken.

To avoid it becoming a trap, one should keep in mind the

danger of been hooked in what was planned at first to be
only a try
.

Such an "experimental" move should not be done under pressure
or emotion, but with the clear objective to limit it to a
test .

The holder of a real option should go further only if there
are more and clearer elements
to show that the prospects
are good, whatever its understandable but risky anguish not to
miss the train.

That person should better state beforehand (in writing) the
      "expiry
time" of the option

This is the date when to decide

* either to go further in a real big way (exercising the option)

* or if not, to quit completely, thanks to the knowledge that will
   be acquired about the feasibility and prospects.

How bad is that effect, and is there a way out?

Wise vs. dangerous traps


Here, we have to make a difference between two shelves in our mind:

A "normal" commitment: people have to take small and big
   commitments
at all times during all their life.

And the damaging "commitment effect" related to a behavioral bias.

A striking example was found in the Milgram experiment in which the
players,
committed progressively to obey (see obedience) an authority,
took at the end
potentially criminal decisions

On the plus side,

to take a commitment can:

On the minus side,

the risk is in the commitment effect:

Be beneficial.
Education for 

example creates
moral commitments.
People brush their
teeth as they were
induced to do it.

Also commitment to
practices or people
can help create some
needed permanent
bonds
.

Without them, life
would  be a series of
whims, with nothing

solid ever built.

Or at least have
   few consequences
:

Let us take as example
an habit to buy nearly
always in the same
shop.
Of course, it might be
wise to try other
outlets, but it does not
guarantee that things
would be better.





This qualifies a commitment that traps
into destructive paths, like
the famous
frog in a water slowly heated up to
boiling point.
Drug addiction also starts with a first
time.

From a commitment to further
  
ones, it gets harder and harder
  
to escape
until too late, from 
  
such traps people either created
   for themselves or were baited
   into by others.

Even people who realize they took a
perilousroad, are often too addicted,
"hooked" to make the effort to
turn back
.
The rut went too deep to get out. To
change  course is to admit the first
decision was wrong.

Manipulation by religious or
political cults, drug "pushers" and
fraudsters are extreme cases of this
habit /addiction-forming technique.
A technique also used in many other
social and economic fields, including
financial marketing or advising.

People need
* a strong independence and self-
  discipline,
* and in some cases external support,
to
"draw the line". So better
not take
the hook at the start
without a good reason.

The opposite bias, commitment phobia

Beware of being committed ...to non commitment.

The commitment phobia is a systematic fear of opting for a course
of actions.

Such habitual indecision and inertia (see status quo bias) is counter-
productivealso, as:

There are times when people, if only as a matter of ethics, have
  
to make decisive choices.

A human being has to accept risks when needed, and choose "on which
side it stands"
.
It might even have, in some exceptional situations, to "burn its ships".

  Sometimes, they would be smart to accept a try so as to "test
     the water"
(the frog again, but a watchful one ;-))

Of course, they have to make such fundamental choices, as well as such
attempts just "to see", in a lucid way, so as not to be trapped or "tempted"
into something they did not wished for.

It can be even wise to "organize" a commitment such as, to take a
personal finance, example to subscribe to a (serious)
monthly savings or investment plan.

This would help to face unanticipated budget problems or to prepare
for retirement.

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      1) click "messages", 2) enter your query in "search archives".

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This page last update:25/08/15  

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