Why you make bad decisions

Today we want to look at a widespread phenomenon: Why you have bad Decisions even though you actually know better. The article is so relevant because this characteristic runs through all levels of society, regardless of intelligence, knowledge or the development of certain skills. And the perfect place to observe this dilemma is the ever-popular online action platform called eBay.

This psychological phenomenon influences your decisions

I can still remember how, in the early days of the virtual auction house, I visited the website almost every day and was very active as both a buyer and a seller. This was partly because you could still get really good bargains in the pre-powerseller era, but I have always been fascinated by eBay from a psychological point of view.

How often I watched in amazement as users outbid each other on more or less trivial items until they were sold at crazy prices. And I will probably never forget how I once witnessed a 50 DM IKEA voucher being auctioned off for 63.75 marks. This completely irrational behavior is based on a psychological phenomenon from behavioral research that is best illustrated by an experiment called Dollar auction can be visualized.

The psychological phenomenon of sunk costs

According to one anecdote Professor Adam Grant from Wharton Management University in Pennsylvania invited his students to auction off a 20-dollar bill. There were only three simple rules.

1. Anyone could place a bid.
2. The highest bidder received the 20-dollar bill.
3. Everyone must pay their highest bid in any case, regardless of whether they won the auction or not.

While the students were initially quite hesitant to place their bids, a real bidding war developed from 17 $, which led to a fascinating situation from a bid of 21 $. At this point, the winner was one dollar in the red, the runner-up 20 $, the third 19 $ and so on. But if you now think that this caused the bidding to stop, then you were wrong, because at the end of the experiment the 20 dollar bill was auctioned off for several hundred dollars.

But why do the students so obviously have a wrong decision even though they actually knew better? Science explains this on the one hand with the theory of sunk costs, i.e. expenses that have been incurred and can no longer be reversed, but still have an emotional impact on future decisions.

Why you make bad decisions: loss aversion

Added to this is the Loss aversion, which states that losses are subjectively weighted more heavily than gains. In practice, the combination of these two phenomena means that disastrous decisions are often made and failed projects are only continued because so much time, energy and money has already been invested in them.

I always immediately think of my student friend Gero, who invested a not inconsiderable sum in a, and I quote, „sure-fire tech stock“ in the new economy during the completely overheated phase of the dotcom bubble. After it had fallen by 25 percent, he bought more shares to make up for his loss. When the share price fell by 50 percent, he borrowed more money to invest even more in the project. At some point, the completely overvalued share fell to zero and Gero had to book a total loss. If only he had listened to Manfred Krug and invested in Deutsche Telekom. But I digress.

The Concord project as an example of sunk costs

Another perfect example of sunk costs in a different context is the development of the Concorde supersonic aircraft, which took off on its first commercial flight from Paris to New York in 1976. Since the start of the project in 1969, the British and French governments had already invested 2.8 billion euros in its development. But although it had long been clear that Concorde would never be profitable, money was pumped into the failed project for another 27 years.

Or to put it colloquially: good money was thrown after bad. Because people were so afraid of abandoning a project that they had long known would never be realized. Successful would end.

This is precisely why so many fail Changes. Because you don't dare to draw a line under failed projects. Because you are afraid to emotionally let go of a wrong decision. And especially because you'd rather do everything you can to make up for your own failure instead of starting all over again.

Yes, falling down, getting up and straightening your crown would be the only correct strategy in the overwhelming majority of cases. But because so much time, energy and even money has already been invested in the pursuit of a Target Instead, one disastrous decision after another is made. And make the overall situation that much worse.

If you're riding a dead horse, get off

As I'm writing this, I can't help but think of an old Native American saying: „If you're riding a dead horse, get off.“ Sounds logical at first, doesn't it? But how do we humans react in everyday life? Driven by our loss aversion, we try everything just to prevent this uncomfortable step. Want a few examples?

• We set up a task force to analyze the dead horse.
• We hire a management consultancy to explain to us via PowerPoint what the horse would be capable of if it were still alive.
• We proclaim „that we have always ridden the horse like this“.
• We book a success guru to motivate the dead horse.
• We change the rider.
• We are looking for a new horse supplier.
• We double the feed ration for the dead horse.
• We hire a recognized expert who can supposedly ride dead horses.
• We buy the very latest generation of whips.
• We are changing the criteria that define a dead horse.
• We approve a special budget for the resuscitation of dead horses.
• We have the dead horse certified according to DIN ISO 9000.
• We are forming a working group to develop alternative areas of application for dead horses.

Even if this list is to be taken with a pinch of salt, there is a great deal of truth behind it, isn't there? And this realization brings me to the crucial question: What is your personal horse and your Concorde project in everyday life?

Or to put it another way: Which goals, dreams and projects are you still pursuing only because you have already invested so many resources, even though you have long felt that it is time to let go? If you have identified such projects in your personal or professional life, then a radical shift in focus will help you. Away from all the material and immaterial costs of the past and towards the costs and potential opportunities of the future.

Accept that you are riding a dead horse, get off and change your means of transportation. Because a train, a sports car or a sailing boat may lead you to the desired success much more quickly and easily. Or as Hermann Hesse put it so wonderfully: „Some people think that holding on makes us strong. But sometimes it's letting go.“ Because as soon as you stop clinging desperately to failed projects, you suddenly have both hands free to start something completely new.