Escalation of commitment

Loss aversion hits us very personally when we have our emotions tied to it.

This other one is this idea of commitment bias, right? Look, generally speaking, we as humans are creatures of habit and we tend to stick with our original plans.

We don't really like a bunch of changes.

So I think This is kind of known in a more scientific way as cognitive dissonance.

This is that habitual nature that goes on in our life.

A lot of us struggle with that as well.

I mean, this is outside of investing, right? It's just a very common thing of this commitment bias, something that we've done for so long that no longer serves us, it's hard for us to break that.

And I think this plays into some of our investments when we make it without counsel, without an advisor, someone to offload a lot of these emotions to, okay? And that's when it gets into the third one.

There are five things driving that.

overconfidence, confirmation bias, escalation of commitment, sunk cost, and decision fatigue.

Let's go through each one with the actual data behind it.

Here's the first one, and it's the most counterintuitive.

Overconfidence tells you your bet is safer than it actually is.

Confirmation bias makes sure you only see the evidence that agrees with you.

Escalation of commitment convinces you that quitting now would waste what you already built.

Sunk cost makes you protect money that's already gone instead of protecting money you haven't spent yet.

But in that master's, there was one business class that we took, and the gentleman teaching the class, teaching the course, said something that I've never forgotten.

And he referred to it as a phenomenon called escalation of commitment.

And this happens in business, but it happens in relationships.

It happens everywhere.

And the way he described this, I don't know if you've ever heard this before, but he said, escalation of commitment is when you have committed to something, And it was a good decision at the time, but it isn't working.

And instead of calling it what it is and pulling out of it, you escalate your level of commitment to it in spite of the fact that it's not working.

And then you continue to escalate that commitment.

It's like, look, I could have been loyal to these two guys.