What Does Barack Obama Know About Behavioral Economics?

Maybe a good bit. Here’s what Obama said yesterday during the Senate Foreign Relations Committee’s hearing with Condoleezza Rice about sending more U.S. soldiers to Iraq:

“And essentially the administration repeatedly has said: ‘We’re doubling down; we’re going to keep on going … because now we’ve got a lot in the pot and we can’t afford to lose what we put in the pot.'”

That, friends, is what’s known as the sunk-cost fallacy. Here’s Wikipedia on the subject and here’s a definition from the Skeptic’s Dictionary:

When one makes a hopeless investment, one sometimes reasons: “I can’t stop now, otherwise what I’ve invested so far will be lost.” This is true, of course, but irrelevant to whether one should continue to invest in the project.

While it remains to be seen if Obama has the qualifications to run for national office, it does appear he’d at least be a pretty good gambler if he put his mind to it.


rubemode

I couldn't have said it better myself willclark, baseball teams practice that behavior fervently. Who cares about the $$? Its costing you fan revenue to run poorer players out there.

Andy from Houston

Obama is right.

After watching Bush's speech this wednesday, its clear he has become a caricature of himself.

I know many people that voted for him in 2000 and 2004 who now cannot even listen to what he says because they are so disgusted with his policies.

Use whatever analogy you want, it seems pretty obvious that the doctrine of pre-emptive strike against a country that did not pose a threat can aptly be termed "debacle."

valisjason

Wow. Impressive argument. Is lack of logic considered a logical fallacy?

jgillmar

actually, you double down in blackjack when you have a favorable position, such as cards that total 10 or 11. calculated risks like this and splitting cards is the only way to win at the game. Essentially, the strategy is to increase your bet when your odds of winning are at their highest and decrease or keep your bet low when the odds are lower Otherwise, like most casino games, the house has the advantage.

Now I'm not saying this is the case in Iraq, just that Barack isn't using the term correctly. The more appropriate poker analogy to sunk-cost fallacy would be continuing to bed with a bad hand because you have so much in the pot already, in the hopes that your opponent will fold or the off chance that you could actually win.

"Double down" sounds better though.

wesleyb41

In poker, I think the term is being "pot-committed". One would have invested so much in a single hand that to back out now would not benefit the overall position.

MisterRisky

That's a great point. Sunk cost errors is one of the top cognitive mistakes I see people make day in and day out. I even see myself make it at least once a week when I wait on the elevator to go to lunch... i'll stand there for a minute and then cut losses and take the stairs. If I was rational I would just take the stairs OR take the elevator but never stand there for a minute and THEN take the stairs. Actually I guess I do reverse of the Iraq mistake. I am too quick to cut losses when actually nothing has changed about the expected outcome. Hmmm...

WillClark

I think the most obvious examples of terrible decisions regarding sunk costs occur every day in professional sports. The "we're paying this guy millions of dollars so he's automatically in the lineup every day" logic costs teams over and over again. Instead of bringing in a rookie who may or may not offer more production, they continue to play the veteran because his contract "demands" it.

hdemott

jgillmar and mrrisky have it pretty much correct. The U.S. is not doubling down - nor would they given the existing odds that we seem to be facing. Pot committed makes more sense, but this is slightly inaccurate as well - as being pot committed necessitates having a fixed stack of chips in front of you - the loss of most of which would cripple your opportunities in the future. Sending in another 20,000 troops certainly does not fully commit our resources. One should look at the situation in the same way that a texas hold-em player looks at an pot - or an investor looks at committing additional capital to an investment. The question for either is the following: does the additional investment in the pot (in this case additional troops) give you the proper risk adjusted odds to justify their committment? The sunk cost has to be ignored, the pot is what it is. So does the addition of 20,000 troops at this juncture allow us to win the peace (so to speak) or stabilize the country or does the lack of those 20,000 troops dooom Iraq to anarchy, which we cannot accept from a poiltical and economic basis? I don't know the answer, but I think that is probably the correct way to think about it.

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angryman

If we want to use a gambling analogy (and why not) I would say the administration continues to overestimate the strength of its hand.

Not to mention that the rake is pretty high, making it virtually impossible to beat the game.

spudrun

as stated before, the analogy is incorrect. Also, it assumes the 20,000 troops are going to be "bet" on the same game. Apparently, a different strategy is going to be used in Iraq. Bush is essentially leaving his original chips in play in Texas Hold em, and plunking 20k on Blackjack..hoping a positive investment from one of them.

therevmatty

I think the analogy he meant to use was "going double or nothing", generally a desperate strategy used when you've lost badly.

FrankTheTank

But for the gambling analogy to play out, you would have to assume that the Iraq War is a negative expectation situation.

What if it's a positive expectation situation, and we just happen to be "down" at this point in time? This analogy assumes the US is the gambler, but what if the US were actually the house?

The Casino doesn't quit offering games just because you walk in one day and take them for several grand. But in the long run, the house will ALWAYS come out ahead.

Now, I'm not saying the Iraq War really is a positive expectation situation (it's looking doubtful, isn't it?), but clearly Bush and his associates do.

If that's the case, they are acting in a completely rational and intelligent manner, and it's not their application of the "sunk cost fallacy" that should upset you. It's that they won't ever accept that they're playing a negative expectation game.

Jun Okumura

When you win the pot, you will get your chips back, and they will have exactly the same value as they had when you put them in. (Their marginal utility may be changed because you, as well as other players, may have subsequently out more chips into the pot, which changes the marginal utility of the chips you get back.) That is very different from the money you put in to build a factory. Sunken costs those chips are not.

As the pot grows (with your chips or others it does not matter), it actually makes sense to go after it with the same number of chips under longer odds. The fact that there are multiple, often shifting number of players doesn't matter in principle because they just feed into the changing odds.

So Barak Obama was wrong in a strictly logical sense. (Nor does it have anything to do with sunken costs.) But since we so often use that trope in exactly the same way in casual conversation, he was correct in a political sense.

BTW, Mr. Obama does play poker, and conservatively at that, from what I read. He's in Chicago, Dr. Levitt is in Chicago...

Do I see a Chicago Celebrity Charity Poker Match coming on? Richard Roeper has also written about poker.

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socialismisevil

YOur Obama gushing is pitiful.
The only thing he has going for him is he is a good looking black male.
Now good looking white males have gotten elected but they to had no substance.
Unless you consider saying, "I did not inhale" as competency.
(some)Whites are so weak they want to show the world they arent racist so they want to back a black person.
Socialism is socialism and that describes Obama as well as most others who seek power.
Vote libertarian and save this country

Sledge

Wow.

Kent

The platitude traders use is to "cut your losses."

indi500fan

Why is Obama referred to as "black"?
or Tiger Woods for that matter?

Isn't that like someone calling me, of "Black Irish" geneology "Hispanic"?

Raymond

I think the "double or nothing" analogy fits best, especially when you understand that this is a private game, no house here.

Obama is clearly refering to "sunk cost" in the above quote, and the shoe does fit. We've heard this admionistration refer over and over to "perseverance" and been adminished repeatedly not to "cut and run" as the soldiers would then have "died for nothing." Unfortunately, this sort of thing plays very well.

Seems that this is a force in search oof a strategy, which has been the problem from the beginning. From all reports Bush is far more comfortable with quantifiable details than with the fog and friction of strategy.

Wasp Star

I'll just point out that Obama has already run and won national office, so that last line is a little strange.

johnleemk

I think what was meant is that Obama has yet to run for election nationwide. Senators are only elected on a state-wide basis.