Once we have made a commitment which could be in the form of promise, effort, money, belief, relationships etc, we remain consistent. We associate high degree of consistency with personal and intellectual strengths. Do we trust people who are inconsistent? Of course not. Without the consistent behavior, humanity would not have existed. Some of the situations this behavior will be useful are
The consistency principle can work against us also. Let us look at several examples
How I overpaid for Tax Preparation
Several years back I went to a tax consultant to file my tax returns. I thought he will charge me Rs 1000/-. He asked me to fill out several forms and then would calculate the service charge. I spent over 30 minutes to complete all the forms. He took few seconds to look at the forms and told me it will cost Rs 4000/-. What did I do? I filed the tax returns through him. Since I spent 30 minutes in filling out the information I got committed to this transaction. I remained consistent to my commitment. Excerpt from ‘Influence‘
It allows us a convenient, relatively effortless, and efficient method for dealing with complex daily environments that make severe demands on our mental energies and capacities. It is not hard to understand, then, why automatic consistency is a difficult reason to curb. It offers us a way to evade the rigors of continuing thought.
$20 CPM for 1 Ad Impression
In 2007, a Morgan Stanley analyst initially projected that the Youtube ads would bring in $720 million next year. The problem is she calculated “$20 CPM,” to mean the price per ad impression, not per thousand ad impressions. Correcting the mistake the revenue would have dropped to 720,000. This is 1000 times lesser than the projected revenue. What did the analyst do when the mistake was pointed out? The analyst was consistent to her initial report. You can read the news here.
In her initial report, Ms. Meeker assumed that 1% of YouTube’s estimated two billion monthly U.S. video streams would carry the ads. The second time around, that rose to 15% of YouTube’s 14 billion monthly world-wide streams, in one scenario she calculated, or 30% of 17.5 billion monthly streams in a more optimistic scenario. That change made up a good chunk of the projected revenue that would have been lost had she just fixed the CPM mistake.
The Telangana movement refers to a group of related political activities organized to support the creation of a new state of Telangana, from the existing state of Andhra Pradesh in South India. Several college students participated in this movement. Are they are not supposed concentrate on their studies? These kinds of behavior once acquired are very hard to break. Over 600+ youth committed suicide. For what? You can read about the news here. Consistency will ruin them. In Psychology of Human Misjudgment – Charlie Munger tells.
And of course, if you make a public disclosure of your conclusion, you’re pounding it into your own head. Many of these students that are screaming at us, you know, they aren’t convincing us, but they’re forming mental change for themselves, because what they’re shouting out [is] what they’re pounding in. And I think educational institutions that create a climate where too much of that goes on are…in a fundamental sense, they’re irresponsible institutions. It’s very important to not put your brain in chains too young by what you shout out.
We value the things that we own more than the identical things that we don’t own. This often causes price mismatch between buyers and sellers. Sellers want to sell their product for more. Why?
- The fact we own the product, we get attached to it (commitment and consistency).
- Loss aversion. It refers to people’s tendency to strongly prefer avoiding losses to acquiring gains.
Dan Ariely on Endowment Effect.
Sean Tamm studied exactly this*. He approached 30 car salespeople and 46 realtors, a population that presumably has much experience with negotiating their maximum willingness to accept (when selling items), as well as with a maximum willingness to pay (when purchasing items). He endowed half of these participants with mugs, and asked the sellers what it would take to sell the mugs and the buyers what it would take to buy the mugs. And despite the extensive real-world market experience of these participants, willingness to accept was about three times higher than willingness to pay, demonstrating that even expert negotiators are susceptible to the endowment effect. This is consistent with previous research, showing an overvaluation of owned goods of about 2.5 times that of unowned goods.
Keep in Mind
- When facts change, I change my mind. What do you do Sir? – John Maynard Keynes
- Sunk cost is an expense that cannot be recovered. Do not throw in more money to make up for the sunk cost. Move on.
- Do not have heavy ideologies. It is one of the extreme distorters of human cognition.