Insanity is defined as doing the same thing over and over again, and expecting different results each time.
Change can be hard to digest for most of us, perhaps hardest for the decision makers! And so we continue to trundle down the same road, kicking the can ever further, hoping that the next turn might wipe out our past mistakes. Meanwhile, the present becomes the past rapidly.
Dumping ever more energy, resources, money, etc. into a failing project exponentially increases… insanity/risks! And continues feeding dodgy suppliers and predators.
When is a good time to cut our losses?
The trick to learning when to cut your losses[1]
Why would a gambler keep playing, even after losing a lot of money? Economists call it the sunk cost fallacy, a phenomenon which drives us to make bad decisions.
this is a transparently stupid way of thinking. Yet, bizarrely, this illogical cognitive pattern is widespread in decision-making; often, involving choices with far higher stakes.
A gambler might call it chasing your losses. The British saying – "don't throw good money after bad" – captures a similar sentiment. Economists call it the sunk cost fallacy, and it's ubiquitous.
We all do it… This is the logic that says "I've sunk a lot of money into my old car. I can't just scrap it now. I really should replace that faulty gearbox". (See also: those who stay in bad relationships for several additional years because they don't want their time together to have been "all for nothing").
What links these examples is the phenomenon of continuing to throw good resources (time or money) after bad, hoping for things to improve when there's no good reason to believe they will.
In other words, people are loath to cut their losses. We are much more likely to continue to senselessly plough time or money into a project that isn't working out, in the hope that it will get better, than take a hit and walk away. What drives this is optimism (that, against the odds, the situation will improve) and an aversion to failure.
Even animals can show a sunk-cost bias.
the consequences of desperately hanging on to irrecoverable costs can be catastrophic.
Thinking only in terms of future possible gains means they fail to factor in unrecoverable funds already spent. It's easy to see why.
After you've invested £10m in a project which hasn't delivered, the case for throwing in a further £5m is far easier to justify, if you only consider returns on £5m – rather than £15m. But in reality, of course, you also don't want to look stupid by abandoning it.
In his book Thinking, Fast and Slow, Nobel laureate Daniel Kahneman hypotheses that "sunk cost" thinking often explains why firms turn to new management, or hire consultants, at this stage of a project's decline. Not, he believes, because they are necessarily more competent than the original managers – but because the new arrivals carry none of the political baggage (and the associated reluctance to cut losses and move on).
Like a gambler 'chasing losses' at a poker table, people stuck in the sunk cost trap will pretend that they have a winning hand. Nick Leeson, the infamous 'Rogue Trader' who caused the collapse of Barings Bank in 1995, followed similar reasoning in trying to recover his position from a series of disastrous early trades.
By contrast, there are fewer checks and balances around political decision-making.
Many examples bear out this trend on a global level. Public infrastructure projects are notorious for running over budget – Britain's proposed 'High Speed Rail 2' project – on course to overspend by £50b and counting, for instance.
Japan, too, has a costly addiction to infrastructure spending. This is part of the reason the country has been saddled with the highest level of national debt in the world. Many of these projects have offered very little fiscal stimulus, and there are numerous 'bridges to nowhere', both literal and metaphorical.
The sunk cost trap drives bad decisions in the billions and trillions
The sunk cost fallacy, then, has huge significance on a micro and macroeconomic level – for personal and political decision-making around the world.
Yet a greater awareness of this illogical thought process may help us avoid falling into these traps – and to hold business leaders and politicians to account when they do.
If in doubt, Everett recommends reflecting on the entire chain of decisions that has led to where you are now, and considering the counterfactuals – in other words, what’s true and not true, a reality check.
And ultimately, it all goes back to the first lesson of gambling. Any good poker player knows when to fold.
So now we can move from concept to practice.
The strategy we see unfolding is not a mistake or due to incompetence. Everything is happening exactly according to plan, executed by very expensively paid cronies with dubious loyalties. You cannot clean the swamp by pouring more water into it.
If in doubt, follow the money. Where does that trail go.. where did all this money disappear? Definitely not into thin air!
Doing the same thing in the hope of a different outcome[2]
Underlying all of Britain's economic woes, however, is the failure to resolve the 2008 banking crisis. While new – and very weak – regulations were put in place in an attempt to protect ordinary depositors from the ill-winds of the global banking and finance sector, the truth is that the banks are still "too big to fail". This means that taxpayers are still on the hook for banking malfeasance.
Worse still, round after round of bank bailouts, quantitative easing and interest rate cuts (aimed at preventing zombie borrowers from defaulting) have failed to deliver a shift to any meaningful economic renewal.
Stress testing was supposed to reveal weaknesses within the banking sector; allowing banks to rectify problems and build resilience. The sad truth is that these tests have morphed into public relations exercises designed to reassure investors and depositors that all is well with banks that are actually on the verge of insolvency.
The stress tests lack credibility because of conflicted objectives, and because political pressures on the Bank and the Bank's own institutional self-interest create incentives to engineer a pass result. The stress tests are also counterproductive in that they create new systemic risks that are invisible to everyone's risk management systems.
another banking domino effect collapse
The Bank of England is asleep at the wheel again, and we will be back to beleaguered banksters begging for bailouts – and the taxpayer will be ripped off yet again, but bigger this time.
Any sober examination of central bank policy… has to conclude that it has failed.
The economies of Europe, Japan and the UK have been stagnant. What little growth we have seen has been the result of population growth rather than any rebound in the economic base. Quantitative easing has helped pump up unsustainable bubbles in property, fine art, corporate junk bonds, automobile loans, student debt and fracking – all of which now look set to burst with devastating consequences for the global economy.
We might kick the can down the road just one more time.
But the underlying problems remain. And rehashing the same failed remedies over and over is not going to change that.
Somebody somewhere has to make good their big losses. Shake the trees! When the bankers run out of robbing each other, who can they turn to? Casino Banking! Who is their last resort?
The masters of the world and lords of the universe focus on feeding their private kitties while duping the public to a false sense of panic in order to rob them. Economy be damned! Wealth is finite. The financial crisis saw the biggest transfer of wealth from the taxpayer to the rich… all facilitated by elected politicians and unelected bureaucrats led by the Central Bankers cabal. Every wonder as to the source of their prosperity?
[1] The trick to learning when to cut your losses
[2] Doing the same thing in the hope of a different outcome
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