Path Dependence of Beliefs
Path dependence of beliefs is the tendency to maintain beliefs or commitments due to prior investment, even when rational evaluation would suggest a change. This behavioral pattern is linked to emotional attachment and may have evolutionary roots.
THE IDEA
Path Dependence of Beliefs
There is a simple test to define path dependence of beliefs (economists have a manifestation of it called the endowment effect).
Say you own a painting you bought for $20,000, and owing to rosy conditions in the art market, it is now worth $40,000. If you owned no painting, would you still acquire it at the current price? If you would not, then you are said to be married to your position. There is no rational reason to keep a painting you would not buy at its current market rate—only an emotional investment. Many people get married to their ideas all the way to the grave. Beliefs are said to be path dependent if the sequence of ideas is such that the first one dominates.
There are reasons to believe that, for evolutionary purposes, we may be programmed to build a loyalty to ideas in which we have invested time. Think about the consequences of being a good trader outside of the market activity, and deciding every morning at 8 a.m. whether to keep the spouse or part with him or her for a better emotional investment elsewhere. Or think of a politician who is so rational that, during a campaign, he changes his mind on a given matter because of fresh evidence and abruptly switches political parties. That would make rational investors who evaluate trades in a proper way a genetic oddity—perhaps a rare mutation. Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdala that blocks the emotions of attachment, meaning that the subject is, literally, a psychopath. Could Soros have a genetic flaw that makes him rational as a decision maker?
Such trait of absence of marriage to ideas is indeed rare among humans. Just as we do with children, we support those in whom we have a heavy investment of food and time until they are able to propagate our genes, so we do with ideas. An academic who became famous for espousing an opinion is not going to voice anything that can possibly devalue his own past work and kill years of investment. People who switch parties become traitors, renegades, or, worst of all, apostates (those who abandoned their religion were punishable by death).
When to use it
Investment decisions: holding onto a stock or asset because of initial purchase price, even when market conditions change.
Career choices: staying in a profession or job because of time and effort invested, despite lack of fulfillment or better opportunities.
Personal relationships: distinguishing past investment from present reasons to continue or change the relationship.
Political or ideological beliefs: maintaining a stance to remain consistent with past statements, rather than adapting to new evidence.
FROM THEORY TO EVERYDAY LIFE
In practice
The painting dilemma
You bought a painting for $20,000 and it is now worth $40,000. Would you buy it today for $40,000? If not, the difference prompts you to examine whether attachment to an existing position is influencing the choice. Transaction costs and the value of keeping it may also matter.
Academic's loyalty to ideas
An academic famous for an opinion will avoid devaluing past work, even if evidence changes, due to years of investment.
A MOMENT TO REFLECT
Put it to work.
Think of a belief you hold strongly. If you had not invested time in it, would you still adopt it today?
In what areas of your life (career, relationships, hobbies) do you see path dependence affecting your decisions?
How can you test whether a belief is held because of reason or because of sunk cost?
CONTINUE THE CONVERSATION
Source texts
- Fooled by Randomness The Hidden Role of Chance in the Markets and in Life (Nassim Nicholas Taleb)