Q: Do you make rational decisions based on the best-estimate future value of objects, investments, and experience?
Your answer to yourself is probably going to be: Yes, of course.
You are wrong. In reality, your decisions are based on your EMOTIONAL investment you already made and accumulated, and the more you invest, the less likely you can let it go.
This is a cognitive bias known as "sunk cost fallacy". In short, you are basing your decision on what has been invested, rather than what it's worth NOW (or in the future).
And it's very simple to make you feel you've invested time and effort... by making you do trivial tasks that amounts of zero importance. Zookeepers (and pet owners) know this principle well... it's called "contra-freeloading".
Contrafreeloading is a term coined in 1963 by animal psychologist Glen Jensen, who created an experiment where 200 albino rats were given a choice: unlimited food pellets in little bowl, or a mechanism where they have to learn to press a lever to release a food pellet. Logically, rats should simply gorge on the effortless food and never touch the lever. However, the opposite happened... rats actually prefer the food source where they had to press a lever, by a large margin. This was since repeated in gerbils, mice, birds, fish, monkeys, chimps... and more. (The only exception is the domestic cat). In short, animals prefer doing a little work (but not too much) for their food, rather than just take a handout.
A great example of contra-freeloading in a scam is ZeekRewards ponzi scheme (as accused by SEC and USSS), an $850 million scheme will soon go to trial. In ZeekRewards, one supposedly buy bids in the Zeekler penny auction, give away the bids to random strangers as promotion, and gets rewarded with certain amount of daily profit based on the bids purchased for the next 90 days. One also needs to post ads to random places on the Internet, and then post the URL on the ZeekRewards website as "verification" to be rewarded. In reality the vast majority of the bids were never used (i.e. the participants simply put money into the system) and expect daily "profit share" of up to 1.8% of the money they put in. The daily posting of ads were never tracked and verified, and indeed some people started a blog just to post ads... that nobody will ever read or see. It's rather obvious, in hindsight, that the "posting the ad" must be contrafreeloading... to make the participant feel they "worked" for and "earned" their share of "profit" amounting to as high as 1.8% DAILY, when the trivial task can literally be done in a few minutes, and be outsourced to some kids for pennies a day.
Yet when all these facts were pointed out to the ZeekRewards affiliates, their answers often are "you work for a competitor", "you work for the 1% to oppress us", "why don't you want us to succeed", and so on. After Zeek was shut down, several members even outright claimed "there were no victims until the government came along."
|Curt Miller, on FB, soon after Zeek was closed by USSS and SEC, claiming that|
"there were no victims (in ZeekRewards) until the government came along".
They are so emotionally (and financially) invested into ZeekRewards, they can longer think rationally and see reason, even when there is NO REASON to continue to behave irrationally.
It is illogical to continue to support an alleged scam AFTER the owner made a plea deal with the government. However, hundreds of people donated money to a organization that promised to put the money toward "defending" ZeekRewards from the SEC. The owner of such organization was later jailed for defrauding the US government in an unrelated matter. The so-called defense ended up being an attorney who attended the receivership meetings, and filed several motions that was denied. He accomplished nothing useful except delay the process for the rest of the victims, and it was widely rumored (but never confirmed) that the rest of the money went to the organizer's private plane's upkeep.
They are the embodiment of sunk cost fallacy.
A related phenomenon is known as the IKEA effect, made popular by Dan Ariely. The term described the feeling of pride by a person after assembling an IKEA furniture, despite less than stellar results. "It may be crooked, but it's mine." The assembler value the item based on the effort they put in, than the actual results.
Perhaps the IKEA effect can also explain why many people value network marketing... They are really there for the network, not the marketing, despite what should have been the purpose of starting a business... to generate profit.
There is no doubt that network marketing is NOT as profitable as many want you to believe. Based on DSA's own figures, in 2015 20.2 million people involved in direct selling sold 36.12 billion worth of still in US retail. Average sales per person per year: $1788 or $149 / month. And that's revenue, not profit. And this average is FALLING (in 2014 it was closer to $1900)
But why would you join a business if NOT for the profit? This becomes clear when you read the various articles touting the virtues of network marketing and the reactions to them, such as Regan Long's "The Brutal Truth About Those Pyramid Schemes" posted on HuffPost. The article can be roughly summarized as "MLM is not a pyramid because I am HAPPY with MY MLM, therefore it can't be illegal, and therefore all MLMs are not pyramid schemes. And why are you so mean toward MLM promoters? Buy their products! You're helping moms like me!" It is basically an illogical appeal to emotion, presented as if it's the gospel truth. But it's the overall tone and the defenses offered that makes the article interesting.
The reactions to the article generally falls into three camps:
* Loverz: OMG thank you! You're telling it the way it is! We're not pyramid schemes!
* Haterz: You're just deluded. MLM are pyramid schemes and you're stupid to have joined it.
* Tweenerz: You both are partially right...
On the "Loverz" side, the typical argument would be
"...Most people don't understand how lucrative and empowering it can be to be your own boss and earn whatever amount of money is equal to the effort you put in."Basically, they're selling the IDEA "be your own boss, own your destiny", rather than the actual profitability, as it is immediately followed by the disclaimer, albeit phrased as an accomplishment: make as much money as YOU want based on effort YOU put in.
What's left unsaid: if you fail, it's your own fault. (Don't blame us)
Basically, this is sunk cost fallacy reinforcement. If I worked this hard, and I don't see success, it's obviously my fault. I have to work "harder"! I have to keep going! I can't let all the effort go to waste! I must be about to turn the corner! When the rational choice would have been to quit and start looking for alternate income sources than to continue a money losing venture.
And if I were the 1 in 100 (roughly) that do end up succeeding (the stars aligned, I recruited the right people, at the right time, at the right place, blah blah blah), and started earning a comfortable income... I would not remember the luck factor. I'd believe that it's my brilliant plan and my "grit" that lead me to my success. This then becomes self-serving bias.
But chances are I will fail (99 out of 100), in which case, I blame external factors. Market is not receptive. Haterz poisoned the market. People just don't understand...
And I keep going, because I somehow STILL believe that I can't let all this effort go to waste.
And maybe I develope a network, even though I'm not making much money from it, but all that effort usually means a group of like-minded people...
Which is how certain MLM markets itself... Come for the income, stay for the friendship. But friendship is NOT why you join a business, is it? It's a fringe benefit at best.
Which reminds me of the Concorde. Everybody remember the Concorde, the supersonic airliner? It turns out, Sunk Cost Fallacy is also known as the Concorde Fallacy.
|British Airways Concorde G-BOAC, circa May 1986, source: Wikimedia|
While the plane, as an investment, did not pan out, the plane itself is actually profitable enough to operate for both British Airways and Air France. It cuts an transatlantic flight that takes 8-12 hours down to 3.5 hours. There's a matter of national pride, demonstration of technological prowess, and so on.
Dawkins dubbed it a fallacy before the Concorde had a chance to prove itself and it did so for the next quarter of a century.
So the "Concorde Fallacy" by itself is not really a fallacy, as Concorde is NOT measured by simply the cost to benefit ratio. The OTHER intangible factors were not in the equation.
But do you join network marketing for the income... or the network / friendship?
And if you didn't get the income, but stayed for the friendship, did you just gave yourself a paycut and a demotion? Can the business be judged a "success"?
Or did you just used sunk cost fallacy to justify staying aboard a sinking ship?