Monday, January 9, 2006

The Sunk-Cost Trap

This is very similar to the Status-quo trap discussed about and has relationship with it. We tend to make choices that justifies past choices (i.e. status-quo in effect). Past choices are “sunk costs” which could be a problem employee or an investment that didn’t turn out right. This in fact goes beyond what the article has covered because when we come to make big decisions concerning past choices it touches on company politics if you are in middle management. Even if one was involved in the decision making of some big decisions normally it was the top guy who signed on that. If you were asked to review an poor performing investment, an problem employee you agreed (or didn’t disagree) to hire you would be naturally cautious when offering your comments. Naturally people would tend to protect the status-quo and will fall into this trap.

How do we avoid this? Let’s try these:

  • Set aside sunk costs – anything that would muddy your thinking about choices at hand. E.g. keep the original decision makers away from the group/team reviewing this past decision;

  • Have a fresh mind by listening carefully to people who were NOT involved with the earlier decisions;

  • Examine why admitting to an earlier mistake distresses you, your boss or the CEO;

  • Be sensitive about the influence of sunk-cost biases;

  • Cultivate a fearless culture for employees that are examining the past decisions and empower them appropriately.

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