Imagine you decide to go and see a film.
You travel to the cinema, you buy your ticket and you sit down to watch it.
Ten minutes in you realise that it’s going nowhere and you aren’t going to enjoy it.
What do you do?
Most people sit and watch the film, not in the hope it’s going to improve but because they’ve already paid for it and thus have to see it through.
Economic theory suggests that this, in fact, is an irrational act.
But it explains why Sevco is sticking with Steven Gerrard for a third season, in spite of his failures in the first two, and it’s why they will continue to back him even after the point where it ceases to make sense in this campaign.
The failure of logic is called the Sunk Cost Fallacy.
It happens when you have incurred such a cost in committing to an action that you believe you have to see it through.
It’s the reason some gamblers continue after heavy losses, it’s why some companies continue to promote products which are failing, it’s the reason some people will sit through a bad movie once they start watching it … because the investment of money or time or effort would be “wasted” otherwise.
But of course, that investment is wasted the second you realise that a mistake has been made.
If you’re not enjoying a film or a date or a meal the best thing you can do is cut your losses, walk away and move on to something else.
The cinema example usually ends with the viewer incurring not one loss but two; the financial loss of the ticket and the wastage of time that could otherwise be spent on a more enjoyable pursuit. Yet for many people, the idea of getting up during the film and walking out simply doesn’t enter their heads at all.
How many times have you said “that’s two hours of my life I’m never getting back?”
We’ve all done it.
We all know what the sunk cost fallacy is, from the inside.
Mammoth companies and serious organisations are not supposed to think along those lines, yet many of them do and this is evident all around us. The HS2 project is one example and so is that of Hinckley Point; both are massive UK infrastructure projects on which so much money has been spent the Exchequer refuses to ditch them even as the go massively over budget.
Sevco has let Gerrard bring more than 30 players to Ibrox in the space of five transfer windows.
They have given him far more money than they had available to spend. We still don’t know how deep a hole they are in over there, but this summer they allowed him to spend another great whack of cash at a time when they should have been making cuts.
The thing is, Sevco no longer knows how to back up from this.
Of the five factors that contributes to the Sunk Cost Fallacy, the desire to stick it out even if it’s clear a mistake is being made is called “the desire not to appear wasteful.” Think how strong that must be in those at Ibrox who are carrying the debts Gerrard has already incurred. They’ve bet their own cash on this guy, and if he fails then they’ll never see a dime of it again … indeed, they must know that their chances of recouping it are already just about zero.
Microeconomic theory teaches us that previous losses should not matter a damn to how companies and individuals behave in the here and now. You can’t look at an investment already made and base your decisions on that; it’s called the bygones principle.
Yet so often people insist on what we call “throwing good money after bad”. It’s prevalent in the world we live in. We do it ourselves, in any number of ways.
And if you were on the Ibrox board and had already underwritten losses in the tens of millions, it’s entirely understandable that you would reject basic economic principles to continue to chase the dream; after all, if Gerrard gets enough money to put a title winning team on the park then surely the money will all roll back in via Champions League qualification ….?
Right? Actually, not so much, no …
Because of course the next phase of this is that Gerrard would want money to compete on that stage, and so the costs would get ever higher and the dream ever more elusive. There’s no pot of gold at the end of this … they could spend so much money padding out this guy’s fantasy, and their own, that they might not be able to recoup it even if he succeeds.
This is Hinckley Point in miniature; that station will eventually generate “cheap” electricity, but the costs of the project itself will make it a loss-making enterprise on a vast scale. Sevco’s board appears largely oblivious to the fact that it’s entirely possible that they could kill the club itself in the endeavour … even if the endeavour were successful.
Which it won’t be, of course, not unless we drop the ball.
Steven Gerrard’s time at Ibrox will be a textbook study in Sunk Cost Fallacy.
It’s not for nothing that it’s often called The Concorde Fallacy; when that project started out, it was meant to cost £70 million and in the end cost £1.3 billion, with most of that absorbed by the French and British governments who both considered it a commercial disaster.
Gerrard has been a disaster for Sevco, because even with European qualification they are still making losses and if they fail to reach this year’s Group Stages the wage bill and other assorted costs, which have soared during his tenure, are going to be crippling.
When it becomes evident that Sevco will not win this year’s title they will have a choice to make; don’t be surprised if, with ten in a row secured at Celtic Park, they decide that Gerrard should be given yet another year to see how he does without that pressure on him.
Of course, at that point their fans would be in open revolt … that might not matter.
Sunk Cost Fallacy persists because it’s a strong urge in some people.
Some of them are on the board at Ibrox.
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