The most powerful man in the world makes a cognitive error

President Bush last night:

Yet it would not be like us to leave our promises unkept, our friends abandoned, and our own security at risk. (Applause.) Ladies and gentlemen: On this day, at this hour, it is still within our power to shape the outcome of this battle. Let us find our resolve, and turn events toward victory. 

In other words, we've invested so much, why walk away now? But it's a logical error, known in social science as the dreaded sunk costs fallacy. Here's a snippet from Why Hawks Win, Daniel Kahneman and Jonathan Renshon's article in the current issue of FP:

When things are going badly in a conflict, the aversion to cutting one's losses, often compounded by wishful thinking, is likely to dominate the calculus of the losing side. This brew of psychological factors tends to cause conflicts to endure long beyond the point where a reasonable observer would see the outcome as a near certainty. Many other factors pull in the same direction, notably the fact that for the leaders who have led their nation to the brink of defeat, the consequences of giving up will usually not be worse if the conflict is prolonged, even if they are worse for the citizens they lead.

U.S. policymakers faced this dilemma at many points in Vietnam and today in Iraq. To withdraw now is to accept a sure loss, and that option is deeply unattractive. The option of hanging on will therefore be relatively attractive, even if the chances of success are small and the cost of delaying failure is high.


The gap between CEOs and the rest of us

Paul Pressler, former chief executive officer of Gap as of yesterday, is likely to be awarded a $14 million severance package for exiting the company. Gap, once the "epitome of preppy" with over 3,000 stores worldwide, has been in serious decline ever since Pressler assumed the CEO mantle in 2002. Gap's decline included a massive 53 percent drop in quarterly profits in July of last year. Admittedly, Gap's market outlook was fairly bleak due to poor designs and other low-cost competition before Pressler stepped in, but after four years of lousy performance and bad strategic decisions about the company under his leadership, the issue of a $14 million payout should raise an eyebrow or two.

This news comes as world economic leaders and interested members of the public prepare to discuss top management pay at Davos in Thursday's Open Forum. Executive pay has been a hotly contested issue recently, as estimates claim that CEOs are now making at least 431 times more than the average worker. While some analysts argue that the pay scales of executive managers have only risen in line with the market, others believe that company profits need to be distributed more evenly. Less controversial, though, is the idea that pay should be linked to performance. Here's French presidential hopeful Nicolas Sarkozy:

[B]ig salaries do not shock me on condition that they are associated with real risk. To take an example, Patrick Kron, who has turned Alstom around, deserves a big salary. His predecessor did not deserve a golden parachute."

Let's see whether Davos, where the, er, "gap" between business leaders and the rest of us is starkly evident, can shed some light on the debate.