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Money Pit. Throwing good money after bad in decisions like real estate investments could be contagious.

Bad Decisions May Be Contagious

Like the flu, a person's emotional state can be contagious. Watch someone cry, and you'll likely feel sad; think about the elderly, and you'll tend to walk slower. Now a study suggests that we can also catch someone else's irrational thought processes.

Anyone who's lost money on a fixer-upper may have succumbed to a classic economic fallacy known as "sunk costs." You make a bad investment in a home that's never going to sell for more than you put in to it, yet you want to justify your investment by continuing to throw money into renovations. One way to avoid this hole is to get advice from someone who has no self-interest in the project. But is the outsider still somehow susceptible to your mindset?

To find out, social psychologist Adam Galinsky of Northwestern University in Evanston, Illinois, and colleagues asked college students to take over decision-making for a person they had never met--and who they didn't know was fictitious. The volunteers were split into two groups: one that felt some connection with the decision-maker and another that didn't.

In one experiment, the volunteers watched the following scenario play out via text on a computer screen: the fictitious decision-maker tried to outbid another person for a prize of 356 points, which equaled $4.45 in real money. The decision-maker started out with 360 points, and every time the other bidder upped the ante by 40 points, the decision-maker followed suit. Volunteers were told that once the decision-maker bid over 356 points, he or she would begin to lose some of the $12 payment for participating in the study.

When the fictitious decision-maker neared this threshold, the volunteers were asked to take over bidding. Objectively, the volunteers should have realized that--like the person who makes a bad investment in a fixer-upper--the decision-maker would keep throwing good money after bad. But the volunteers who felt an identification with the fictitious player (i.e., those told by the researchers that they shared the same month of birth or year in school) made almost 60% more bids and were more likely to lose money than those who didn't feel a connection. The team reports the findings of this experiment--and three similar experiments--in this month's issue of the Journal of Experimental Social Psychology.

Galinsky believes that the results suggest that companies trying to reverse results of bad decisions should find true outsiders. He points to troubled automaker Ford as an example. Instead of hiring from within--as General Motors (GM) recently did--Ford made Alan Mulally from Boeing, an aerospace company, their chief executive officer. Many experts believe that Ford is now recovering quicker than GM. "It's true that insiders have more knowledge," Galinsky says. "But when you are already down the road of a failed course of action, you really need ... a true outsider."

"I didn't realize just how easily linkages across decision-makers can be formed," says psychologist Barry Staw of the University of California, Berkeley, who was one of the first researchers to suggest using a second decision-maker to avoid sunk costs. Psychologist Joshua Ackerman of the Massachusetts Institute of Technology in Cambridge says the study is yet another demonstration of psychological contagions. "My first thought was where does it end?" Ackerman says. "When do people stop taking on the attributes of others?"