Choiceology with Katy Milkman

Episode: To Fight Another Day
Guests: Alex Imas & Mary Stockwell
Date: June 3, 2024

Episode Overview

In this episode, host Dr. Katy Milkman examines why we sometimes double down on risky choices after losses—and why sometimes the wisest move is to cut our losses and walk away. Using stirring examples from the American Revolution, Milkman and her guests unravel the psychology behind “realizing losses” versus “chasing losses” and explore behavioral research (the realization effect) that can transform both personal and financial decision-making.

Key Discussion Points & Insights

1. Lessons from History: Retreat, Resilience, & Strategic Decision-making

(00:51 — 17:15)

Mary Stockwell’s Stories from the American Revolution:

• Battle of Long Island (1776):

  • Washington’s army is surprised by the British, faces a disastrous rear attack, but instead of stubbornly holding ground, Washington orchestrates a daring retreat across the East River, saving the Continental Army.
  • “No, you run away to fight another day. That’s pretty much unheard of in 17th, 18th-century battles in Europe.” – Mary Stockwell (07:44)
  • Washington “cuts his losses” rather than risking the total destruction of the fledgling army and the American cause.

• Cornwallis’ Southern Campaign:

  • After losing key cities, British General Cornwallis chases American forces into the interior South, despite accumulating losses.
  • At the Battle of Guilford Courthouse, Cornwallis, outnumbered and losing men at a staggering rate, refuses to regroup, fighting doggedly and suffering a Pyrrhic victory:
    • “The British win the field, but Cornwallis loses a quarter of his men. It’s a victory like a Pyrrhic victory. Greene has really won the day psychologically. He will live to fight another day.” – Mary Stockwell (13:37)
  • Unlike the Americans, Cornwallis is unable to reset after setbacks, choosing escalation over recuperation, which damages his army and the British war effort.

• Washington & Greene’s Strategic Pattern:

  • American leaders repeatedly demonstrate risk aversion after losses, retreating to preserve fighting capacity and morale, a critical factor in their ultimate victory.

Memorable Quotes & Insights:

• “So much of the American Revolution is retreating. Washington has come up with a new way to fight. He realizes I just have to keep my army in the field long enough to wear the British down.” – Mary Stockwell (08:19)
• “The realization effect tells us that if we’ve managed to put a past loss behind us...we’ll be able to make more clear-headed choices about risk going forward.” – Katy Milkman (32:13)

2. Behavioral Science Explained: The Realization Effect

(17:15 — 31:46)

Research Interview with Alex Imas

• The Realization Effect:

  • We behave differently after a loss depending on whether that loss is “realized” (fully acknowledged/finalized) or still “on paper” (seen as possibly recoverable).
  • “In the experimental literature...people took on more risk after losses [that were] on paper...but...less risk after a loss [that was] realized.” – Alex Imas (22:08)

• Methodology:

  • Reviewing past studies and designing new experiments where participants invest in rounds, with losses sometimes realized (money handed over) and sometimes not.
  • Finding: After realizing a loss, people become more risk-averse; after mere 'paper losses,' they are prone to chase bigger risks to recoup ("loss chasing").

• Prospect Theory & Reference Points:

  • “People narrowly bracket their choices. Status quo is your reference point. Realization resets the reference point and thus risk appetite.” – Alex Imas (26:10)
  • Selling a losing stock or accepting a loss lets you move on; clinging to hope of recovery leads to escalation of commitment and risk-taking.

• Real-world Advice:

  • “If you’re thinking about an important financial decision and you’ve had some sort of prior gain and loss, take the day to think about it...Take as many breaks as you think you need. That event is going to allow you to reset your reference point and come at the new decision in a fresh state of mind.” – Alex Imas (30:31)

Notable Quotes:

• “It turns out that if we’ve formalized a loss or realized it, we’re more risk averse about our next decision than if we haven’t made that realization yet and are still hoping to get things to turn around.” – Katy Milkman (18:05)

3. Connecting History and Science: Avoiding Costly Mistakes

The Realization Effect in History

• The Americans were effective because they effectively realized their losses, regrouped, and acted strategically, while the British (esp. Cornwallis) escalated risks in an attempt to undo setbacks—leading to their downfall.

Personal and Financial Takeaways:

• Realization events—like selling a losing stock, ending a bad project, or calling off a failing venture—can break the psychological spell of chasing losses.
• Give yourself permission for a “fresh start.” Take breaks between decisions, reset, and avoid escalating risky commitments after losses.

The Fresh Start Effect:

(31:51 — 33:22)

• Milkman briefly draws a parallel to her research on the Fresh Start Effect:
  • “The realization effect is like a cousin of the fresh start effect. Both rely on our funny psychological ability to find ways of putting the past in the past so we can start again.” – Katy Milkman (32:30)
  • Moments that feel like a reset enable us to make better, more rational decisions.

Important Segment Timestamps

• 00:51 — 17:15 | Mary Stockwell recounts battles from the American Revolution & lessons on cutting losses
• 17:15 — 31:46 | Katy Milkman and Alex Imas discuss the realization effect; experiments and takeaways
• 31:51 — 33:22 | Milkman connects the realization effect to the Fresh Start Effect and wraps up core lessons

Final Takeaways & Actionable Insights

• When facing losses, realizing them fully (letting go, moving on) helps prevent dangerous risk-taking and escalation.
• Take breaks and create fresh starts between successive decisions, particularly after setbacks.
• History and behavioral economics together teach us: persistence is about resilience and adaptation, not blind escalation of risk.

Selected Notable Quotes with Timestamps

• Mary Stockwell:
  • “No, you run away to fight another day. That’s pretty much unheard of in 17th, 18th-century battles in Europe.” (07:44)
• Alex Imas:
  • “[If] you don't give yourself breaks or these quote unquote realization events, then you tend to chase your losses... So for listeners who are involved in trading, I would say take as many breaks as you think you need.” (30:31)
• Katy Milkman:
  • “The realization effect tells us that if we’ve managed to put a past loss behind us...we’ll be able to make more clear-headed choices about risk going forward.” (32:13)

Practical wisdom:
Before you double down after a setback—whether on the battlefield, in business, or with your investments—reflect, reset, and realize your losses. You’ll make smarter, more balanced decisions when you fight another day.

For further reading/listening:

• Mary Stockwell’s books (links in show notes)
• Alex Imas’s paper: "The Realization Effect: Risk Taking after Realized versus Paper Losses" (link in show notes)
• Katy Milkman’s book How to Change and her Substack newsletter

End of summary.