The commitment bias and sunk costs

You hear the term in your introductory microeconomics course, sunk costs are sunk. But do you internalize this key concept? Unlikely. Sunk costs are what others suffer from. You are not a quitter. You will muscle through to success. Unfortunately, the sunk cost argument is also present as a bias in our thinking, the commitment bias. We commit to a specific behavior or thinking and do not easy change our behavior. We want to stay committed and not thought as someone who is always changing their point of view.  We want to save face and not be thought as being wrong. If we have a specific mental model in our head that we believe is correct, we stay committed because we believe luck or reality will turn in our favor. 

It is more likely that we will stick with a decision in the face of negative outcomes. We want to be proved correct. Of course, if there are commitment biases in others, we can be rewarded by taking advantage of it. Stickiness with investor commitment will lead to slower speed of adjustment in prices. The result will be trends which can be exploited. Trend-following exploits commitment biases in many forms.

So, the decision rule is simple, exploit the commitment bias of others and ensure that you question your own commitment to any one way of thinking. Avoiding the commitment bias is not the same as being willing to change willy-nilly. Fighting a commitment bias is a willingness to accept what is not working and changing for something better if dictated by the environment.