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With a Detroit bailout, the Fed may become too invested to quit

It's called the behavioral trap. And it's curable.

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I'm thinking of selling my shares of AIG. They're just not performing the way the government promised when they purchased them on my behalf. Maybe I'll get some shares of GM instead.

Just as we taxpayers are the owners of some floundering financials, we may also soon own pieces of the Big Three car companies.

The bailouts have been on everybody's lips lately (perhaps second only to speculation about the Obama family dog). Whether for or against, both sides of the debate have been using slippery slope arguments to defend their view.

On the wayward side, the argument goes, a Detroit bailout would spark a frenzy reminiscent of fish pellets in a carp pond. Credit card companies will demand a share; whole cities are already holding up cupped hands; makers of the dog polisher, mesh raincoat, and electric banana straightener will need some help.

On the leeward, let the auto industry slip into oblivion and myriad other industries will tumble down after it. Before long, the entire economy will be in a heap at the bottom.

The aftermath of either scenario looks more like a black hole that even experts can't hope to illuminate than resolution.

But what is certain is that should Detroit (or any others) get the bailout go-ahead, the Fed will find themselves headed straight for a behavioral trap.

The behavioral trap arises after a once-hopeful course of action becomes undesirable and difficult to escape from.

The tricky part is that, while it's possible to abort the mission should things go wrong, prior investments lead people to make decisions they otherwise wouldn't.

You want out, but at every point of decision – continue or withdraw? – you look back at the work you had to do to get there. Wasting it is a painful prospect, while one more step – one more investment – just do the trick.

Calling Dell customer service is a behavioral trap. One more "Your call is important to us," and I'm hanging up. "It can't be much longer now," we reason. And so on. The longer you wait – the bigger the investment – the harder it is to hang up the phone.


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