If there is one factor that has defined the challenge leaders have faced in the last few unprecedented weeks and months, it must be uncertainty. In times like this, being able to change course and maintain our adaptability is absolutely vital, particularly as we seek to make critical business decisions. In this kind of environment, there is a cognitive bias that has particular potential to wreak havoc: sunk cost bias, also known as the sunk cost trap or escalation of commitment.
Sunk cost bias, the tendency to continue investing in a losing proposition because of what it’s already cost us, has been responsible for the failure of countless relationships, projects, and even businesses. If you’ve ever bid more than you planned on eBay, held onto a financial investment for too long, sat through a dreadful movie right to the end, eaten far too much in order to finish a meal you bought, or continued to wear an uncomfortable pair of shoes to “get your money’s worth”, you’ve most likely been caught by this mental trap.
The problem is caused by a (probably unconscious) desire to avoid losing the value of an earlier investment of some sort. As such, the sense of loss of the initial investment distorts our ability to properly evaluate the pros and cons of the current situation. There is no need to look any further than the collapse of Barings Bank, which was caused by the desire of a single trader, Nick Leeson, to recapture escalating losses, to see how devastating the impact of this kind of decision-making can be.
Many critical leadership activities involve a series of choices, rather than an isolated decision. They are vulnerable to sunk cost bias because each choice tends to be approached serially, creating a desire to justify previous investments. When this happens, we are highly susceptible to an escalation of our commitment to the original decision and, consequently, likely to become stuck on a failing course of action.
This may not sound complex, but in practice, it can be very difficult to avoid. The solution relies on developing the ability to remove the unconscious biases that lead us to treat initial costs as though they are relevant to new decisions. In reality, these costs are “sunk”, so the goal is to ensure that ongoing decisions consider only the future benefits weighed up against the additional costs, inconvenience, and time involved.
The key, as described in this article, is to implement a set of protective measures and to learn to let go of the past, without becoming overly risk averse. It provides six “rules” that can help, and I particularly like its final recommendation.
Read the Article: How Great Leaders Avoid the Sunk Cost Trap
When commitment escalates inappropriately, what is really happening is that our judgment is getting clouded by our personal stake. This stake may be financial, or it could be associated with how we feel our reputation will be impacted by changing course. Either way, it is essential that we find a way to shift our focus of attention away from the previously selected, now irrelevant, course of action to give proper consideration to future costs and benefits. Some simple techniques that can help, in addition to those in the article, include:
- Getting views of those who weren’t involved early on.
- If you find that admitting an earlier mistake feels distressing, explore to try to identify what is at stake for you personally, and deal with any self-esteem and ego issues that arise.
- Avoiding a culture of fear or blame which will tend to encourage staff to perpetuate mistakes.
- Determining rewards by looking at the decision process rather than the outcome. This motivates people to make the best decisions at different stages, whether or not their initial decisions have been proven to be correct.
- Constantly reassess the rationality of future commitments based on future costs and benefits, attempting to identify failures early. Take an “experimental” approach and be prepared to shift to another course of action at any time.