People often have trouble
knowing when to cut losses

People invest the important resource of time in their formal education, deciding that years spent in college will pay dividends at a future date. They invest energy in voluntary activities hoping that they can contribute to a better quality of life in their communities. They work hard to acquire specialized knowledge in areas that will advance their careers.

For all these decisions, however, there are opportunity costs. Money, time, and energy spent on one set of activities means that those resources are not available for other attractive alternatives.

In addition to problems of opportunity costs, people have a difficult time knowing when to stop their investments of resources. They have difficulty saying to themselves, "This activity in which I have invested is not paying off with any benefits. It is time for me to cut my losses and move on."

Instead, people often continue to invest their resources, hoping that outcomes will turn out better.

The problem is called "escalation of commitment" by behavioral scientists who study real-life decision making. Instead of admitting that their original decisions were poor and led to losses, people often escalate their commitment to their decisions. They run the risk, then, of losing even more resources in attempts to gain back their original investments.

The problem can be seen in the workplace. Some people are unhappy with their jobs. But given that they have spent so many years to prepare themselves for success in those jobs, they are reluctant to cut their losses and seek other types of employment.

They may be unhappy in the accounting profession, for example, but they are concerned with their previous investments. They may have spent four or five years in college, and in addition may have invested in internships and in additional coursework necessary to become certified public accountants. Instead of changing careers, they might say to themselves, "If only I give accounting a couple more years, maybe my day to day work will change and be more enjoyable."

In making this decision, they rarely consider the possibility that those additional years will then form an additional commitment to accounting that will make it even harder to change in the future.

The escalation of commitment can be seen in the vacation plans of many people in Hawaii. They go to Las Vegas and, like most people, lose money. But instead of cutting their losses and making other types of vacation plans, they plan their next trip to Vegas. Part of their decision making often includes the thought, "Maybe I can win back the money I lost on my last trip."

The refusal to recognize and to cut losses is a widespread problem. It can occur in relationships.

Consider two people who have been a romantic item for five years. The relationship is not terrible, but neither is it so positive that it contributes to the happiness of the two people. Friends and family members comment that the relationship seems to have problems, and the two people know that they have more spats than they should.

But do they cut their losses or do they escalate their commitment? Many will escalate and will say, "Let's give this relationship six more months and maybe it will turn around for the better." If they make this decision, they will not have that six months to meet other people with whom they might form a more satisfying relationship.