Anticipatory measures, sunk costs, and the endowment effect.
‘A stitch in time saves nine’. That was the phrase Britain’s Prime Minister Boris Johnson chose to employ in September 2020 while announcing further pandemic lockdown restrictions. Ironically if he had made that stitch as early as February, we might not still be having conversations about it nearly a year and a half later. A stitch too late is the first of many.
The original phrase, 'a stitch in time', has a widely contested origin. Some say it's English, others French. It may be a sewing analogy or a sailing one. Either way, the 300-year-old false rhyme is an apt tool for remembering the power of anticipatory measures.
It's a lot easier, in retrospect, to weigh the seemingly intolerable pain of wearing masks, washing hands, and maintaining distance for a short while against the year of havoc we've lost by refusing it. The magnitude of the stitch required grew in scale and impact as the situation developed. At first, we were only asked to wash our hands. Soon we were locked indoors, rationing food and looting toilet rolls as though in the midst of war.
It's a good reminder of how situations can spiral out of control when not closely managed. No discipline seems pleasant at the time, but sometimes the pain of change is the easier pill to swallow.
How can we stay ahead of the curve? What negative externalities are easily preventable with a little foresight? Anticipatory measures are steps taken to minimise potential impact - not to prevent the inevitable. You can't avoid every issue. You can only guard against risk.
Hesitation in moments that require action carries its own risk. As the ground shifts, standing still is no different to moving backwards. Stalling over simple decisions can be costly to projects with many moving pieces.
Sometimes making the right choice requires some discomfort. The ego is the enemy.
Gifts from the past
Often we hold on to a position in order to appear consistent with our past selves, instead of acting to benefit our future self. Once we start a course of action we feel compelled to finish it - not because it will bring further reward, but because we take pleasure in being consistent. Changing your tune can mean admitting you were wrong.
Have you ever made a wrong turn, and instead of turning back you decide to keep going and try making another turn to reconnect to your route? The further you go down the new road the less sense it makes to turn back, and soon enough you’re entirely committed to making the best of a bad situation. It's the same reason people stick with degrees, professions and relationships that make them miserable.
We say 'If I quit now then all my time, sweat and tears will have been for nothing!'
The pain of changing course seems greater than staying put. This is the sunk-cost fallacy. We want to protect our past investments and the shame of being wrong.
Seth Godin refers to the sunk-cost fallacy as a gift from our past selves. We made a decision we thought would benefit our future selves. Now, with the benefit of hindsight, we can choose to accept that gift, or change course.
Do you drag yourself out of bed for the social engagement an optimistic version of yourself signed you up for last week? Or do you re-evaluate your commitment in the present based on the currently available information that you're dreadfully tired and in need of a glass of wine?
Somehow we convince ourselves that the only way to make an investment of 6 months worthwhile is investing another 12 months into the same project. Even if you're unhappy, at least you squeezed every drop of disappointment out of the time you allocated!
Psychologically we're loss-averse creatures. We feel the pain of losing things more than the pleasure of gaining them. It's better not to lose £10 than it is to gain £10. If that sounds silly and irrational you're absolutely right—and that's why it's important to guard against these cognitive biases.
There is always a cost. That’s the truth we ignore. There is the cost of the status quo— the time, labour, money and reputation we have already staked in our position— and then there's the opportunity cost of what we might have gained otherwise.
When considering gifts from our past selves we should be aware of the endowment effect. The endowment effect is an emotional bias that causes us to irrationally value something we own higher than its market value, or the value of comparable objects.
A combination of loss aversion and the endowment effect makes us undervalue opportunity costs. We don't appreciate the value of things we miss out on by sticking to what we already have. That's why buyers and sellers have such different value judgements.
Sometimes the fallacy associated with ownership is purely psychological. In one study, researchers gave participants a bar of chocolate, placing it at the side of their desk but not letting them touch it. They spent 30 minutes working on a project with the chocolate in the corner of their eye and were told they could have it afterwards. When they finished, they were given a choice to keep the chocolate or sell it back at a price they could determine. Another group had undergone the same exercise but were simply handed the chocolate at the end without having it on their desk for the duration of the study.
The participants in the first group sold their chocolate bars back at an average of $1.72, while the ones in the second group who were given the chocolate directly but spent less time with it, only valued the chocolate at $1.35. The impact of having been told it was theirs and developing a sense of ownership, despite never touching it, was powerful.
Think carefully about gifts you accept from your past self and what the opportunity would be worth on the open market. Don't feel compelled to live by the commitments you made in the past.
Always weigh the opportunity cost. Sometimes the opportunity cost is the missed benefit of doing something new. At other times it's minimising the damage of adverse circumstances.
The cost of course correction may be worth the associated pain if you're thinking with a clear head.
I’d also love any thoughts on what I should write about next.
Read on for this week’s recommendations >>
Books I’ve read/seen/will impulsively buy and add to my “to read” shelf on Goodreads. Recommendations from newsletter readers are always welcome:
- Ultralearning by Scott H. Young - seen. I heard an interview with the author a few years ago and had it pegged as a must-read. My only complaint while reading is that I can only read it in places I can take notes at the same time.
- The Tipping Point by Malcolm Gladwell - read. Another Gladwell classic. Read for great anecdotes about change that happens slow, then fast, and the impact of hidden tipping points in all areas of life.
- The Ride of A Lifetime by Robert Iger - wishlisted. This was recommended to me near the start of the pandemic by an entrepreneur I admire a lot, and it keeps coming up!