Fallacies may lead to sub-optimal behaviour at the individual level, but that does not make them irrational. At the social level especially they provide some of the most rational explanations for seemingly irrational behaviour.
Take the media industry in Nigeria, for example. It is common for journalists to have salary arrears that stretch back for more than a year. In fact, the more prestigious the newspaper brand, the higher the likelihood of long arrears.
Paradoxically Nigerian Journalists work harder than journalists in many African countries, and the longer pay delays the higher the output.
My initial thought when I first witnessed this was to assume that “grey journalism” (what we call “soli” in Ghana) is simply stronger in Nigeria so the formal salary is merely a formality. But more probing suggested that this was not the case.
Then last week it came to me: Sunk Costs fallacy.
The longer pay delays, the higher the amount that would be lost if one leaves the job, and the more valuable the amount becomes from a lump sum investment opportunity point of view. Journalists then see strong incentive in keeping the business running, so that: 1) it does not fail completely and 2) they don’t get laid off for performance issues. Journalists reinforce this with “equity theory” – the idea that it would be unfair to lose their arrears whilst those who stay benefit from the work done to date. The owners then factor this into their financing model (i.e. they see the interest-free borrowing from employees as lower-cost than the high interest charged by the banks for short-term working capital needs). In the end everyone’s logic reinforces everyone’s.
This is obviously fallacious thinking on all sides because economic optimality will advise that the journalists look more to the future opportunities they are losing for staying put in a high-risk job and not the “sunk costs” of the unpaid salaries, which are in the past. It will advise also that newspaper proprietors simply trim staff and reorganise their business models.
But in the same way that scammed investors throw more money into pyramid schemes the riskier it gets, Nigerian journalists opt instead to stay.
From a higher vantage point, however, the fallacy provides the most rational way of describing the group behaviour whatever we may think of the individual judgement that aggregates to the behaviour.