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Choiceology: Episode 3


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Imagine that you’ve put in effort toward a goal, but things haven’t quite worked out the way you hoped. How do you know when it’s time to let it go?

Maybe you’ve set a goal that was more expensive than you expected; maybe it’s taking longer to reach than you thought. So the question is, do you double down and continue to work toward that increasingly difficult goal, or do you move on to something new? Do you fish or cut bait?

On this episode of Choiceology with Dan Heath, we look at how past effort, time or expense can influence the way we make decisions moving forward—even when they shouldn’t.

The episode begins on an auction house floor but quickly climbs to the top of the highest peak in the world. Along the way, you’ll see how common is the lure to continue no matter what, and how it affects all kinds of decisions, big and small.

  • Professor Michael Roberto explains how to identify this bias in your day-to-day life. You can read his paper on how it may have influenced some life-and-death decisions at the top of Mount Everest.
  • Climbers on the ill-fated 1996 Everest expedition recall the tragedy. Lou Kasischke’s book on his experience is called After the Wind.
  • A story about Intel CEO Andy Grove—one of the most successful business leaders of the 20th century— reveals one way to fight back against the influence of this trap.

Choiceology is an original podcast from Charles Schwab.

If you enjoy the show, please leave a rating or review on Apple Podcasts.

Click to show the transcript

Dan Heath: I’m Dan Heath, and this is Choiceology.

Auctioneer: ... the bidding now. $4 and a quarter. $4.25, can I go $4.25? Now, $4.50. Bidding at $4.50. $4.50?

Palm Tree: $4.50.

Auctioneer: Palm tree is in …

Dan Heath: It’s a classic scene: the fast-talking auctioneer. The tension mounts as the bids go higher. Who has the nerve to see it through? Who will win the coveted piece, the rare painting, the famous sculpture, the delicate antique?

Auctioneer: All right, $5.75. At $5.75.

Speaker 4: $5.75.

Auctioneer: Now $6.00.

Dan Heath: If you’ve ever been part of a live auction, you know it’s basically a form of psychological hazing. There are some forces in play that tempt us to make unwise decisions. We’re going to look at one of those forces in this episode.

Now, in the warmth and safety of an auction house, this force might lead you to ask, “Did I really just pay $350 for a porcelain elephant figurine?” But the stakes are much, much higher when the same force afflicts you in the frigid death zone of the world’s highest mountain.

This is Choiceology, an original podcast from Charles Schwab. It’s a show that reveals hidden psychological forces; forces that affect the way you make decisions about everything, from where to take a vacation, to how often you go to the gym, to how you run your business. We analyze those decisions, big ones and small ones, to help you avoid expensive mistakes.

We’ll come back to that auction house later. You won’t believe what’s being auctioned. But right now, I want to take you to one of the harshest environments on Earth.

The highest mountain in the world straddles the border between Nepal and Tibet. The summit of Mount Everest has beckoned adventurers since the 1920s. The first official ascent of Everest was successfully completed by Tenzing Norgay and Edmund Hillary in 1953. It remains an irresistible challenge for thousands of mountaineers all over the world. It has also claimed the lives of over 290 climbers in the years since.

A group of eight climbers set out with their guides and Sherpas on the final leg of an expedition to the top of the world. It was 1996.

John Taske: The view was the most spectacular I have ever seen in my life. We were coming through the clouds. In the distance was Makalu, the fourth-highest mountain in the world, and you really feel that you are not on the planet, you are above the planet.

My name is John Taske.

Dan Heath: John had been in the military, the Australian SAS, which is roughly equivalent to the American Navy Seals. He had seen a lot in his life, but this was a highlight.

John Taske: It was like looking at a map from space, to look down from 10,000 feet to the Tibetan plateau. It’s a sight I will never forget.

Dan Heath: John joined seven other clients in the expedition, each of whom had paid as much as $70,000 for the experience.

Lou Kasischke: My name is Lou Kasischke, and I live in Harbor Springs, Michigan.

Dan Heath: Lou Kasischke was another of the paying clients. He had climbed six of the seven highest mountains on the seven continents. Everest was the last on the list.

Lou Kasischke: It was just for the experience and the adventure, and the camaraderie of the people I climbed with, and the satisfactions of pursuing a hard goal.

Dan Heath: It’s midnight on May 10th, 1996. Lou and John and the rest of their group are now 26,000 feet above sea level at Camp 4. There are four camps after Base Camp, each one higher than the last. Camp 4 is nearly five miles high, at the lower edge of what’s known ominously as the Death Zone.

Lou Kasischke: The challenge is altitude. Everything you do is difficult, and your body must adapt to the altitude. I mean, for example, if you were somehow to travel from sea level and get dropped off at the top of Everest, you would be dead within a minute.

Dan Heath: At this altitude, your speech slows, your memory becomes foggy, your judgment is impaired, but you still have to make crucial decisions. Those decisions determine whether or not you’ll make it to the top, and more importantly, whether or not you’ll make it back down to camp.

One of the key choices is the turnaround time. Basically, you agree with your team that if you can’t make it to the summit by a certain time, you turn around and head back to camp. The reason …

Lou Kasischke:  Because if anything goes wrong, in order to survive when you’re in the Death Zone, you have to be back at your highest camp in daylight. If you’re caught out, exposed to the weather overnight, at that point, statistically not possible to survive.

Dan Heath: The climbers agreed that if they weren’t at the summit by 2 p.m. at the absolute latest, they would turn back. But that plan, as prudent as it was, couldn’t completely ensure the safety of the climbers, because climbers are human. They make the same errors in judgment we all make. It’s just that the stakes are so much higher.

Lou Kasischke:  What’s common: You get to the point as a climber where you believe that the things you read about experienced by others, they just won’t happen to you.

Dan Heath: On the day of the final ascent, some problems slowed them down. The climbers needed ropes to cross a treacherous section, and the ropes weren’t installed in time. And another problem had to do with one of the other climbers.

John Taske: The team was only as fast as its slower climber, and we were very slow overnight, and it was because we were sort of keeping Doug with us.

Dan Heath: Doug Hansen was one of the other paying clients. The year prior, he had been forced to turn around on an expedition to the summit. He had been working extra jobs to save for this second chance.

John Taske: And that, I think, cost us probably about an hour and a half overnight, or at least an hour.

Dan Heath: To further complicate things, it was also crowded on the mountain. Another expedition was climbing at the same time, and a Taiwanese group was ahead of them on the ascent. That group ended up slowing the progress for the rest of the climbers through the narrow and treacherous Hillary Step, where you have to climb a steep rock face with ropes.

And then there was the weather. They’d experienced bad weather for several days earlier in the climb. In fact, there were serious doubts at one point that they would be able to summit at all if the jet stream continued to blast into the upper face of the mountain.

Lou Kasischke: There we were at 26,000 feet, fairly convinced that we were not going to go to the summit, but then the weather calmed, and our leader made the decision that we were going to continue for the top. I thought it was a very bad idea to continue to the top under the circumstances, but nevertheless, everybody else was getting ready to go, and I finally decided I was going to go as well, then, because in climbing there’s only one thing worse than not reaching the top, and that is when others do and you don’t.

So, we had a turnaround time that if anything went wrong, we would under all circumstances have to be back to High Camp in daylight, and we had planned for an 18-hour continuous push to the summit. Weather was good. Conditions were good. People were healthy. Things were moving. We were on time, and when we moved onto that final ridge, I had even said to myself that I had actually pulled this off.

Dan Heath: The climbers were so close to their goal. They could see it right in front of them.

Lou Kasischke: You know you can reach the top, and to me, what’s interesting about that moment is because the challenge changed. Because for six weeks, the challenge of climbing Everest was all about the physical climb. Were you tough enough, physically, to climb the highest mountain in the world? But at that moment at noon, so close to the top but out of time, the challenge became not one of physical strength, but one of inner strength, inner strength to make the right decision.

Dan Heath: Lou Kasischke and John Taske and the other clients had invested months of training, tens of thousands of dollars, weeks of acclimatizing to the altitude, and hours and hours of brutally challenging extreme climbing to reach this point. What would you do? John turned around.

On his way down, he passed Lou and another member of the team.

John Taske: They were plodding along in sort of zombie mode, and I stopped them and said, “Fellows, I’m going down. We’re well out of time. Where are you blokes going?” And they said, “We’re heading to the top.” And I said, “Look at the time now. It’s going to be even later by the time you fellows get there.”

Dan Heath: Lou continued on, but crossing paths with John gave him pause. And then …

Lou Kasischke: My heart started to beat out of control, and that beating action of my heart actually brought me to my knees.

When I first made that decision to continue, all I was thinking about was me. My goal, my hard work, my this and my that. It was all about me. But that beating heart caused me to stop and gave me the strength to look beyond myself.

Dan Heath: Lou made the incredibly difficult decision to turn around. And while it seemed like an easier choice for John Taske with his rigorous military training …

John Taske: Of course, there’s the other part, where I’ve invested six years … For six years, I just lived, breathed climbing. So to turn around is difficult. Emotionally, it is irresistible.

Dan Heath: But Lou and John made the right choice. As the day wore on, the weather changed for the worse. A blizzard whipped up between Base 4 and the summit.

John Taske: And it was 40 below zero, and estimated wind speed of 180 kilometers an hour, and we all got frostbite from being out just a few seconds. Basically, it’s indescribable unless you’re there.

Dan Heath: The expedition leader, New Zealander Rob Hall, didn’t make it to the summit until 2:30 p.m., well past the deadline, and he waited at the top to help other climbers as they arrived. One of those climbers was Doug Hansen, the climber I mentioned earlier, the man who had worked three jobs to save money for the expedition. He was determined to reach the summit, and he did, but not until after 3:45, almost two hours past the deadline, and far too late to make it back to camp in daylight.

Why didn’t Doug turn around? On his way up, Doug had told a fellow climber, “I’ve put too much of myself into this mountain to quit now without giving everything I’ve got.” I want you to remember Doug’s quote for later. “I’ve put too much of myself into this mountain to quit now.”

The storm is raging. It’s very windy and cold. Visibility is near zero. It’s getting dark. Expedition leader Rob Hall faces a difficult decision: Should he leave the struggling Doug Hansen behind and help the other climbers or stay and try to get Doug back down the mountain?

Rob Hall made the fateful choice to stay with Doug Hansen.

John Taske: Basically, the second night of the storm, when Rob was still alive and we were all exhorting him to move when he couldn’t, and the fact that we were going to lose Rob hit me, and particularly because of the situation, we were actually, we were on an open net.

Dan Heath: They were all listening on an open satellite communications channel.

John Taske: We were on an open net, and he was talking to his wife in New Zealand, when she was seven months pregnant with their first baby, and he knew he was going to die, and so did she. That was emotionally pretty fierce for me. We were all so frustrated that there was nothing we could do to help him.

Dan Heath:  Rob Hall and his client Doug Hansen both died on the mountain. Rob’s wedding ring was recovered near the south summit and returned to his wife. Doug Hansen’s body was never found.

In the end, eight people from three expedition groups died. It was one of the worst tragedies in Mount Everest climbing history.

John Taske is a retired medical doctor and had a long and successful career in the Australian Army. He’s based in Brisbane.

Lou Kasischke is a retired lawyer, accountant and businessman based in Michigan. I’ve got a link in the show notes to his book about the 1996 Everest tragedy. It’s called After the Wind.

I’m Dan Heath, and this is Choiceology, an original podcast by Charles Schwab. It’s all about how and why we make certain decisions, and why those decisions aren’t always the best ones.

Making decisions on Mount Everest. You shut down your whole life to pursue a dream: the dream of conquering the highest peak on Earth. You’ve pushed and pushed your way up the mountain. You’re fatigued. You’re oxygen-deprived. And then the moment comes: Do you push through against your better judgment, or do you make the smart choice, and let your dream slip away? It’s hard to imagine a more extreme environment for decision-making, but the number one force that pushes you to make a bad decision on Everest is actually the same force that you and I combat all the time, here in our climate-controlled lives.

Here’s Michael Roberto. He’s a professor of management at Bryant University, and he has researched and written about the psychological forces that affected the climbers in that 1996 Everest disaster.

Michael Roberto: First and foremost, sunk cost trap really stuck out. The idea of sunk cost trap is that if you’ve invested a lot of time, money and other resources in the course of action, and that investment is irreversible—essentially, “sunk,” it’s like it’s buried at the bottom of the ocean—we’re supposed to cut our losses. We’re supposed to ignore sunk costs, but it’s not the way we behave as human beings.

Dan Heath: Remember how Doug Hansen stated that, “I’ve put too much of myself into this mountain to quit now without giving everything I’ve got.” Well, that’s sunk cost. That effort shouldn’t have affected his decision to continue climbing, but it did, with tragic consequences.

Michael Roberto: His sunk cost actually had been accumulating over the course of two climbs, because he had stopped short of the summit the previous year, climbing with Rob Hall, who was the expedition leader. And now here he was a second time, getting so close, and he just couldn’t turn around.

Psychologists have tried to understand, why is it that we throw good money after bad, or good effort after bad? We do this in all sorts of things, right? Baseball teams do it when they sign a free agent to a huge amount of money, and then they keep playing the player even if they stink, because they put so much into that guaranteed contract. We do it all over; the question is, why? And one notion is loss aversion.

It says, once we get in a situation where we’re framing something from a loss perspective, then we engage in more risk-seeking behavior. So, in other words, we try to get out of that loss position, and we take more and more risk the worse our situation becomes. We throw good money after bad.

Dan Heath:  Speaking of throwing good money after bad, let’s get back to where we started the show: the auction.

Auctioneer: So, ladies and gentleman, are we ready for this $5 auction? I need a yes!

Audience: Yes!

Auctioneer:  Here we go! Starting the bidding at $0.25 now, $0.25 in the room, do we have $0.25?

Speaker 9: Yes.

Auctioneer: That gorgeous man with the beautiful beard. $0.25 up …

Dan Heath: OK, now, the thing about this auction, there actually aren’t any precious antiques or rare masterpieces. There’s not even a lousy gift certificate. The big event at this auction is a $5 bill. That’s it.

Auctioneer:  … And the ladies are back in. Thank you. $2.50, betting at $2.50. We go $2.75. $2.75, $2.75 …

Dan Heath:  You might think, “Well, that’s a pointless auction. Somebody will win with a $5 bid, and that will be it.” And you’d be right, except that there’s a trick embedded in this auction. The high bidder will win the $5 bill, but unlike a normal auction, the second-highest bidder still has to pay their bid, and they get nothing to show for it.

Speaker 10: $4.

Auctioneer: $4, bidding at …

Speaker 11:  $4.25.

Auctioneer:  $4 and a quarter. We’re at $4 and a quarter now.

Palm Tree: $4.50.

Auctioneer: $4.50 now. $4.75. Back to you, palm tree.

Speaker 11: $4.75.

Auctioneer: $4.75 is in!

Dan Heath: OK, let’s pause right here. Let’s say you’re the person who just bid $4.75 for a $5 bill, and now somebody else bids $5. So here’s your choice: If you bow out now, you’ll lose $4.75 for sure, or you could bid $5.25 for a $5 bill. That’s crazy, right? But at least if you won the auction, you’d have $5. You’d only be out of pocket $0.25, versus if you quit, you’ll lose $4.75 for sure.

So what now? Let’s see what our bidders do.

Auctioneer: The pressure is on. Money is … the stakes are high.

Speaker 10:  $9.

Auctioneer: He does it! He does it at $9. $9.25, I’m going to go $9.25 now. No pressure, the whole room’s watching.

Speaker 12: $9.25.

Auctioneer: $9.50.

Speaker 10: $9.50.

Auctioneer: $9.50 is now. $9.75?

Speaker 10: No.

Auctioneer: Are you going to let this one go?

Speaker 10: I’ll do $10.

Auctioneer: He does $10. One more time! $10.25 is the highest bid.

Palm Tree: $10.50.

Auctioneer: $10.50, all right!

Speaker 10: I’m out.

Auctioneer:  Going once, going twice, sold. All right, let’s give a big round of applause. Congratulations to our bidder. Well done, well done.

Dan Heath: Think about what happened here: a $5 bill, and the winner bid $10.50 for it. Why did they keep bidding?

You can probably empathize with these bidders. I mean, it makes sense to bid $0.25 or $0.50 on a $5 bill, but once you hit $5, and $5.25, surely you must realize where this is going, what the dynamic is. But they stayed in.

Like the climbers who kept on going to the summit when they should have turned around, it was really hard for our bidders to let go of their bids, even when holding on meant losing money. Weird, right? That’s the power of the sunk cost fallacy.

So how can we avoid this trap? Here’s Michael Roberto again.

Michael Roberto: I talk about sort of four strategies for avoiding or preventing the sunk cost trap, and the first is having a preemptive conversation. Before you start, you need to talk about under what conditions might you cut your losses? What’s your exit strategy, and when would you pull the ripcord?

The second is, you have to build some constructive tension. Having someone from outside who can play the devil’s advocate is really important.

The third is, you have to make sure that you don’t frame the decision to go on as go/no-go. If you frame a decision as, “Should we continue or not?” Go/no-go? And there’s a lot of sunk cost. Well, the pressure to go, the momentum there is tremendous, right? So you have to think in terms of options. Is this really as simple as go/no-go, or are there other options to fundamentally achieving whatever goal we might have?

 And then finally, the issue of opportunity cost. Think about, you’re working on some information technology project, and you’ve spent $50 million, and it’s really not going well, and gosh, maybe the technology is already obsolete. What typically happens is, you have a conversation about, “If we spend $10 million more, we can finish the project.”

We talk about the hard costs of completing the project. What we don’t talk about is, what are the opportunity costs of continuing forward with this project? In other words, what opportunities are we forgoing because we’re continuing to pour money and people and effort into trying to rescue this failing project? People don’t think that way, in terms of opportunity cost, but those opportunity costs can be huge for businesses or people in all kinds of circumstances.

Dan Heath: And this is a key point. This is what will save you in the auction situation. Not the $5 auction, but a normal auction. Before you bid that $350 for the elephant figurine, force yourself to ask, “What’s the next best thing I could buy for $350?”

Well, that’s three or four fine dining experiences, or it’s a pair of amazing headphones, or it’s a gumball every day for the next 20 years. What’s right for you? I don’t pretend to know, but I’m skeptical it’s the figurine.

Michael Roberto is a professor of management at Bryant University in Smithfield, Rhode Island. I’ve popped a link into the show notes. You can find those on your device, and that link will take you to Michael’s paper on how sunk cost and some other key biases may have influenced decision-making at the top of Mount Everest.

I want to share one more example about how to fight back against the sunk cost fallacy. It’s from Andy Grove, who was the long time CEO of Intel, and it comes from his memoir, Only the Paranoid Survive.

Some quick context: We know Intel as the microprocessor people, “Intel inside” and all of that. But Intel was originally a manufacturer of memory chips, RAM, and for a while in the ’70s, they had cornered the market. Then a new wave of Japanese competitors entered the market, and in the late ’70s and early ’80s, they really put the screws to Intel. They were delivering better memory at cheaper prices. By the mid-1980s, Intel was actually losing money on the memory business.

Meanwhile, Intel had a new product, called the microprocessor, and IBM had picked it to be the brains of its first personal computer. So Grove has this line of business, microprocessors. It’s new, it’s promising, but it’s small. And meanwhile, the business you built your company on, memory chips, is suffering.

So the hard question was, what should he do about the memory business? His team had been fighting for months. Some people wanted to try to build a super plant, to gain parity with the Japanese. Others lobbied for bleeding-edge technology, something the Japanese couldn’t easily replicate. Others thought it was time to give up entirely on the memory business, to concede defeat.

But think about how that would feel: You were founded on memory. You built a company on memory. You’ve invested so much. How could you let it go? I hope some of this is ringing your sunk cost alarm bells.

One day, Grove and Chairman Gordon Moore were in Grove’s office, rehashing these debates one more time. Grove was frustrated. He got up and looked out his window, and happened to see the Ferris wheel of the Great America Amusement Park in the distance, just revolving in an endless cycle, and it sparked a thought.

“Gordon, if we got kicked out, and the board brought in replacements for us, what do you think our successors would do?” And Gordon Moore responded without hesitation, “Oh, they’d get us out of the memory business.” And Andy Grove said, “Well, why don’t you and I walk out the front door, turn around, come back in, and just do it ourselves.”

That was the moment that broke the logjam. That question. That instant. It wasn’t an easy decision to implement. It took a long time, and Grove said it was incredibly painful, but they knew in that moment that it was the right thing to do. Intel’s market cap skyrocketed from about $3.4 billion on December 31st, 1985, to about $214 billion as of February 15th, 2018.1

How did they do it? It boiled down to a question: “What would our successors do?” A quick flash to an outside perspective. It helped them to create some distance from all the emotions tied up with sunk costs. For a long-timer at Intel, it was really hard to give up on memory chips, but for a newcomer, less so. The outside perspective makes it easier to be objective.

So when you’re in a tough situation where you’ve invested a lot, but had mixed results, imagine that a wise outsider had to come in and make the decision for you. Someone who is not burdened with the backstory and the baggage.

Maybe you invested some money in the restaurant of a friend of a friend, and it’s not doing so well. Will you put in more? Boy, it hurts to think about losing the money that you invested already, but it’s gone. You can’t get it back. It’s a sunk cost. The question is, what should you do going forward?

Ask Grove’s question: “What would a wise outsider do if they took over your investment?” A simple question that took 30 seconds to answer helped Andy Grove, one of the smartest CEOs in modern times, resolve one of the hardest decisions he ever faced.

So keep that question in your hip pocket. Who knows what it might do for you.

This has been Choiceology, an original podcast from Charles Schwab. If you’d like to know even more about sunk cost, and how it affects your financial decisions, I’ve put a link to some bonus materials in the episode’s show notes, which you can find on your device any time.

If you like the show, leave us a review on Apple Podcast. You can subscribe there, too, or anywhere else you listen. It’s free, and subscribing means you’ll never miss an episode.

Next time on Choiceology, another hidden force that may be affecting the way you make decisions. It’s a force that has major implications in law, the canonization of saints, and even in the way you see and experience the world.

 I’m Dan Heath. Talk to you next time.

Disclosure: The information provided here is for general informational purposes only, and should not be considered an offer or a solicitation or advice to buy or sell any security, an individualized recommendation or personalized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed. Investing involves risk, including loss of principle. Past performance is no guarantee of future results.

1 Source: Morningstar Direct, as of 2/15/2018.

Important Disclosures:

The information provided here is for general informational purposes only and should not be considered an offer or solicitation or advice to buy or sell any security, an individualized recommendation or personalized investment advice.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Investing involves risk, including loss of principal.

Past performance is no guarantee of future results.

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