Whither Greece After the Election? Why Do They Stay on a Doomed Course?

Summary:  Greece had its election.  The pro-austerity party won, despite their policy’s lack of success — and lack of historical or theoretical foundation (it’s contrary to basic economics).  Despite the applause in the banker-dominated news media, it’s unlikely to work, and every month of delay only makes Greece weaker — less able to well-manage an exit from the EMU. Today we ask why Greece’s leaders stay with a failed, perhaps terminal if continued, policy?

Facing choices. How to choose?

Contents

  1. Introduction
  2. The escalation of commitment
  3. Consequences of the vote in Greece
  4. Other articles about escalation of compliance
  5. For more information about the euro-crisis

(1)  Introduction

The projected victory of the pro-victory coalition in the Greek election represents a decision by a majority of the Greek people to continue with the failed policies that have so damaged their nation since joining the European Monetary Union (EMU), and the austerity policies that are destroying Greece since their first “adjustment package in early 2010.

These policies have little foundation in economic theory or history, are based on factually incorrect descriptions of events (monetary and competitiveness factors were the cause, excess debt the result), and have proven disastrous to the GIIPS nations (see the links at the end).  Why the enthusiasm by so many of Greece’s leaders to stay the course?  There are many reasons. Fear of the unknown if they leave the euro.  Pressure to conform with the policies of their greater peers in Europe.  And escalation of commitment, the subject of this post.

(2)  The escalation of commitment

One major source of error in decision making is escalation of commitment — the human tendency to continue to follow a failing course of action. … There is a considerable amount of research that indicates that individuals and groups escalate commitment to a course of action in order to justify their original decision. … James G. March, put it this way: “Now that I have made my decision, I need to find good reasons for it.”

— “Escalation of Commitment: Patterns of Retrospective Rationality“, Fred C. Lunenburg, International Journal of Management, Business, and Administration, 2010 (references omitted)

For a summary of this research see this excerpt from “Escalation of Commitment” by Theresa F. Kelly and Katherine L. Milkman (Asst Prof, Wharton), in Encyclopedia of Management Theory, E.H. Kessler (Editor), in press.

Rational thought. It’s difficult.

When a decision maker discovers that a previously selected course of action is failing, she is faced with a dilemma: Should she pull out her remaining resources and invest in a more promising alternative, or should she stick with her initial decision and hope that persistence will eventually pay off? Management scholars have documented a tendency of decision makers to escalate commitment to previously selected courses of action when objective evidence suggests that staying the course is unwise.

… While there are many situations where the best course of action is to commit further resources to a failing investment, the term “escalation of commitment” describes only those situations where objective evidence indicates that continuing with an investment is unwise, and yet an individual chooses to invest further in spite of this.

Explanations for Escalation of Commitment

Self-justification.  {This} provides one explanation for why people escalate commitment to their past investments. Feeling personally responsible for an investment that turns sour intensifies the threat associated with failure and increases a decision maker’s motivation to justify the original choice to herself. Negative feedback on a past investment decision calls the validity of the original decision into question and is dissonant with a decision maker’s natural desire to see herself as competent. Many decision makers attempt to eliminate this conflict by convincing themselves that their failing ventures will turn around if they simply invest more resources. To do so and succeed would prove that the original choice was valid and eliminate the “cognitive dissonance” created by the initial negative feedback.

Confirmation Bias.  Biased information processing is one way that decision makers reduce the dissonance that arises when their positive self-perceptions conflict with evidence that past investments are underperforming. After committing to a choice, people are far more likely to notice and overweight evidence that supports their decision and ignore and underweight evidence that does not. Furthermore, decision makers actively seek information that confirms the validity of their decisions. This means that decision makers may actually be less aware of problems with their current investments, or, when they are aware of such problems, they may underestimate their severity. “Confirmation bias” can therefore cause decision makers to escalate commitment to bad investments.

Impression Management.  {This} focuses on a decision maker’s need to justify her past choices to others. The outcome of an investment is rarely free from external scrutiny, and a decision maker may escalate commitment to her original investment to avoid admitting to others that the venture was a failure or that her decision was flawed. Such admissions might cause others to doubt her competence. Furthermore, people tend to punish decision makers for inconsistency.

(3)  Consequences of the vote in Greece

The austerity policies will continue in Greece and the other GIIPS. The GIIPS’ economies will grow weaker, month by month.  Their societies will continue to suffer, and probably lose social cohesion. The combination will reduce their ability to adapt, to successfully change course.

The peoples of Europe must decide to unify — completing the long post-WWII process — or fragment (perhaps to try again in the future). The structure of the EMU is tilted to benefit the northern states (especially Germany) vs. the GIIPS. That means the north benefits from the current regime, and explains why they make loans to the GIIPS to remain in the EMU.  It’s worth paying a little to keep the marks in the game.

A more difficult question:  why do the GIIPS stay in the EMU?  Fear of war, with unification as the cure. Unification as a means to retain major power status in the 21st century.  Fear of change.

But the EMU, a half-way house on the way to unification, cannot last much longer.  Decisions will be made.  Delay only guarantees that the choice gets made under disorderly conditions, reducing the odds of wise actions.

For a look at the future see

they have our world in their hands!

(4)  Other articles about escalation of compliance

(5)  For more information about the euro-crisis

(a) Posts about Greece:

  1. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
  2. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
  3. Important:  Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
  4. Hot news! The Wehrmacht failed to take Greece. Now Germany tries again, with a different method., 28 January 2012
  5. Europe has chosen a harsh future.  All the paths for Greece lead into darkness., 24 February 2012
  6. A note from Athens: Feeling on the ground has palpably changed, 1 March 2012 — A clear sign that the Greek people are ready for change

(b)  Analysis and forecasts about the crisis in Europe, reporting their slow march to the cliff:

  1. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
  2. Governments cannot go bankrupt, 2 April 2010 — But they can default.
  3. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
  4. The Fate of Europe, nearing the point of decision, 13 September 2011
  5. Europe drifts towards the brink of a cataclysm, 26 September 2011
  6. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
  7. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
  8. Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
  9. Where to from here, Europe?  Some experts share their views., 8 November 2011
  10. Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
  11. Looking ahead to see the new shape of Europe, 22 November 2011
  12. Europe passes the last exit.  A great crisis lies ahead., 21 February 2012
  13. The Fate of Europe has become visible. Only how and when the break comes remains uncertain., 6 June 2012

This post originally appeared at Fabius Maximus and is posted with permission.

2 Responses to "Whither Greece After the Election? Why Do They Stay on a Doomed Course?"

  1. DA Simarmata   June 18, 2012 at 9:03 pm

    Go Back To Basic:
    The problem of OCA or common currency for several states should visit again the basic characteristic of every country. Its public sector has different characteristic from one country to the others , due to geography, social values, and inherent human tendencies of the people. Money is only the means of exchanging products, which are produced by the combination of the public capital with the private capital. The monetary sector do its work to facilitate the exchanges in the basic production activities, and then in the higher level activity like in capital market. But the primary purpose should be in the real sectors. The performance of the economy of any country is the result of the public sector and private sector performance. Its combination is the building block of its economy. How the monetary union could harmonize the above differences? At what cost?
    Differences in the above factors of the public sector and the private sector needs different magnitude of each sector. Hence the common currency without common public sector would lead to internal conflict, or leading to failure. Unless there is a common public sector the endeavor is unsustainable.

  2. Michael Kefalopoulos   June 19, 2012 at 6:24 am

    A BUSINESS MODELL FOR GREECE?
    I agree with the arguments as above, but the question that needs to be answered – in a specific way – what is the alternative course for Greece or GIIPS? Greece needs a new business modell, but which one? How should the country survive? By selling what, to whom and under which conditions? It is about the strategic course of the country and therefore must be answered very precise and specific. Once the business modell question is answered then Greece can decide about the way to go, i.e. within/outside Europe/Eurozone etc. No economist sofar has answered this basic question about the business modell.