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Pre-commitment in Business Works Best When It Is Credible

Pre-commitment in business works best when it is credible, when people can’t readily change the committed course of action because of the effort required, because of financial costs or because the decision is a revocable even if their career or success depends on this.

Business people could be tempted that their future self

A common example is that of cutting up one’s credit cards to prevent future spending, but pre-commitment doesn’t have to be so extreme, if you know you tend to overspend when shopping for holiday presents then just resolving to spend less is unlikely to be effective. A better step toward responsibility would be to leave credit cards at home when shopping even if this is an entrepreneur’s business.

By only bringing cash you set an upper limit on what can be spent in that shopping trip. Credible pre-commitment has been used to help addicts and people at risk for addiction to manage their behavior. Many casinos have self exclusion programs that allow patrons to establish binding limits on their play, for example you could voluntarily establish limits on how much you can bet, how much credit you can be extended or even whether you can enter a particular casino.

In the city state of Singapore there was great apprehension in advance of the opening of two mega casinos in 2010. Lawmakers and the public alike were concerned that many people wouldn’t be able to control their gambling, so the government gave people the option to self exclude to prevent themselves from entering and within two years about 100,000 people had enrolled in that program.

Think about this for a moment: the people who have no interest in gambling whatsoever, who don’t derive enjoyment from gambling wouldn’t bother to self exclude, they don’t need to. People self exclude precisely because they recognize that they do derive enjoyment from gambling, that they could be tempted, that their future self might not be able to make the right decisions and so they eliminate any concern by pre-committing for success.

Even entrepreneurs engage in pre-commitment at great potential cost to themselves

Credible pre-commitment works even for problem gamblers, they can’t beat their addiction when they can’t enter in the first place, but when a commitment isn’t credible as when casinos or state remind people about the dangers of gambling, but don’t bar entry into the casinos then it doesn’t help problem gamblers and has only very limited benefits or success for everyone else.

People engage in pre-commitment at great potential cost to themselves, they’ll purposefully establish penalties for missing deadlines in order to motivate themselves to complete tasks. Research by that behavioral economists Dan Ariely and his colleagues show that costly pre-commitment really helps, especially when people are sophisticated about how they set their career deadlines.

For example, people in one study were given tasks that had to be completed in a three-week period in order to maximize their earnings. They were allowed to pre-commit to particular deadlines with financial penalties for missing those deadlines. Think about this option for a moment: it’s like voluntarily taking money away from your future self. Alternatively they could just plan to complete all tasks by the end of the three week period.

Those people who pre-committed by self imposing weekly deadlines, did very well overall while those people who just plan to complete everything by the end of the experiment did very poorly. Pre-commitment works when it binds us to a course of action, when we can’t change from our original business plan without penalty.