Earlier this month, the New York Times featured an interesting article titled "How to Pick the Fastest Lane in the Supermarket." You will be amazed at the depth and sophistication of research on grocery lines. For example, MIT professor Richard Larson ("who is considered the foremost expert on queues") calculated that we spend 37 billion hours per year waiting in lines. (According to other research in the article, though, we overestimate that time by 36%.)
When I speak on decision-making, one of my most reliable examples concerns the universal experience of choosing the fastest lane at the grocery store. We go through all these crazy calculations like the ones in the article...and then stubbornly stick with our choice even after we see other lines moving faster. Maybe we didn't notice a customer with a fistful of coupons, or the professional juggler bagging groceries in our lane has been replaced by a trainee.
But we won't change lanes, even when we see that we would get out sooner if we moved to the 4x100-meter relay just one lane to our left. And why? Because we chose this lane and have now invested our time waiting in this lane.
All the people who have laughed with me and identified with that example will get a kick out of the Times article. It's a whole list of additional factors, backed by research and expert opinion, we can consider on how to make that initial choice. Unfortunately, the article was silent on the subject of why, despite all that care, we don't put any care into our choice to stay put when we see another lane is faster.
That's a shame, because our problem isn't with the initial decision. We know plenty of relevant factors in choosing a lane. Our problem is that we don't recognize that we have later chances to make a new and better decision - the same decision of which lane to be in but with additional information. Instead, we either think we are done deciding and ignore the new information, or think the new decision should give weight to irrelevant factors like the time we've already spent in our current lane or having to admit our initial choice didn't work out.
This irrational stubbornness is arguably a much bigger problem than making a perfect initial choice. In addition to some of those 37 billion hours of line-waiting we could avoid, this problem occurs throughout our decision-making lives in all sorts of places that are surely less trivial than waiting in a grocery line.
There is a lot of research - maybe even more than the research that goes on in grocery-store lines - about how we behave irrationally to postpone "the pain of paying." This includes research on sunk-cost bias (in which we treat non-recoverable expenses as investments) and loss aversion. You can see these biases across the decision-making board.
A common complaint of financial advisors is that when they recommend stocks in a client's portfolio to sell, the client will hold all the losers and only sell the winners. We think that if we keep holding it, it could still rise and keep us from having to put it in the loss column. We don't have to recognize the loss until we sell.
What we miss here is that the decision to hold a losing stock is the same decision as buying that stock as a new investment. Any losses we have previously accrued are irrelevant to whether it is a good investment going forward. In a rational world, we would approach the decision as a brand new one: "Would I buy this stock today?" The answer to that question should be the same whether we are winning to the stock or losing to it. We don't realize that when we decide to not sell, we should consider identical factors to a new decision to buy.
By holding the stock, we are not only ignoring signs that could lead to additional losses, but we are tying up money that we could be investing in winning positions. There is opportunity cost to the decision on top of the negative expectation of the stock itself.
The influence of sunk cost bias can also keep people in bad relationships. Have you ever asked someone why they are still in a bad relationship or a bad friendship and they say, "I've put three years of my life intp this person ...." If the relationship is bad, how much time you have already put in gets in the way of what to do in the future, just as it does for grocery lines or investing.
The supermarket is an economics lab hiding in plain sight. The article in the Times recognized that, but it only scratched the surface of what a grocery line can reveal about human behavior.