Management | Rethink action vs inaction: omission has a cost

Management | Rethink action vs inaction: omission has a cost
Comment E-mail Print Share
First Published: Mon, Sep 24 2007. 01 39 AM IST
Updated: Mon, Sep 24 2007. 01 39 AM IST
Let’s say your friend Vicky, who has been dabbling in the stock market, comes to you with his sad story of stock market loss. Vicky tells you of how he recently sold his shares in company A to buy 100 shares in company B. While the share price of company B had remained the same, the prices of company A’s shares had skyrocketed since he sold them. Had he not sold his shares in company A, he would have netted a gain of Rs50,000. Vicky was obviously upset about the opportunity he missed because of his decision to sell stock A.
Now, another friend of yours, Sandy, comes to you with his sad story. He informs you that he had been thinking of selling the shares he held in company B and using that money to buy shares in company A. However, he never acted on this and prices of stock A skyrocketed. He is lamenting the fact that had he acted at the right moment, he would have been richer by Rs50,000.
Of these two individuals, who do you think would have a greater regret about the illusory Rs50,000 they didn’t get to make? Vicky, who was unable to realize that gain because of his action, or Sandy, who failed because of his inaction? Despite the fact that both of them are at financially equivalent points, the chances are pretty good that Vicky will be more miserable about his status.
Why? Studies have shown that people tend to be more upset about something they do that results in a loss compared with an equal loss caused by inaction. This has been labelled the “omission bias” because people tend to irrationally prefer harm caused by omission (inaction) rather than harm caused by commission (action). As a consequence of this bias, people have a tendency to prefer the status quo, which can result in poor decisions in the longer run.
Most business and non-business decisions involve some trade-offs. The omission bias results in people giving greater weight to the status quo than an active change. For example, if switching a production line offers some huge benefits but also results in some minor risks, research has shown that people are less likely to make the switch. This effect seems to happen even in the case of life-or-death decisions. It has been shown that people are unwilling to vaccinate their children if the vaccine has a small risk of causing the child’s death, even if the risk of death from the disease because of a failure to vaccinate is far greater. The omission bias results in people being willing to take on additional risk in order to avoid actively making choices that result in potential harm.
We often find ourselves in situations where we are not fully satisfied with the status quo (be it your kid’s school, your current job, or the hygiene level of the butcher shop where you buy your fresh meat). But, when we consider the alternatives, they also have some level of uncertainty and risks associated with them.
We refrain from trying these out because it’s likely to hurt us more if they don’t work out to our satisfaction. It is easier for us to justify bearing the inconvenience of the status quo because it doesn’t involve taking any proactive action.
In order to protect yourself from being too influenced by this bias, it is important you rethink action versus inaction. You must realize that in many decision-making situations, failing to act is also an active choice you make. Interestingly, research has also shown that while actions cause short-term regret, omissions (failure to act) cause more long-term regret. So, if you can start thinking about the consequences of acting and not acting while maintaining a long-term perspective, you may be able to compensate for your propensity to affect an outcome by not acting.
Praveen Aggarwal is an associate professor of marketing at the Labowitz School of Business & Economics at the University of Minnesota Duluth and Rajiv Vaidyanathan is a professor of marketing and director of MBA programme at the University of Minnesota Duluth.
Send your comments to driversseat@livemint.com
Comment E-mail Print Share
First Published: Mon, Sep 24 2007. 01 39 AM IST
More Topics: Inflation | Cost | Money Matters | Equities |