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Gambling Permitted at Most U.S. Corporations

We make a lot of choices during each business day, and many of those choices are an extension of choices that began long before. In a world where remembering what we had for breakfast can be difficult, remembering to view our choices in context is nearly impossible. But there is significant business risk in losing the perspective of where our current choices originated.
Imagine for a moment that you finally buy your dream car – a used Jaguar XJS convertible (it’s bottle green with brown leather, just in case you’re wondering). You spend $11,500 on it, and prepare to start livin’ the dream. About a month later, you put $600 into it, but you figure that it makes sense to put a little maintenance into a 94,000 mile vehicle. Two months later, another $500. Three months later, another $750. Every time you bring it to your mechanic, he assures you that it’s a great car and that it’s worth it to ‘bring it up to speed’ (let’s not get distracted by thinking the mechanic is a crook now – let’s imagine he’s the best mechanic you’ve ever had and has been a trustworthy resource for 14 years).
Psychological research demonstrates that, because you’ve already made the emotional commitment to the car, and because you’ve already invested so much money in it, your tendency will be to continue your commitment to the increasingly expensive car.
Since you’re just reading about this tendency, and not immersed in it, you might be thinking “no way! That’s just throwing good money after bad!” And that’s true. Someone who was being rational would recognize that the money already spent is sunk cost. Because it’s not recoverable, it’s not rational to consider it when figuring out what to do next. Only future benefits and future investments should be considered. Unfortunately, most people are driven by emotions, which encourage them to persist and to resist recognizing that their earlier decision was a bad one. The psychological term for this behavior is escalation of commitment to a losing course of action, and it’s extremely common.
Maintaining commitment to failed projects or ideas has both financial and ethical ramifications. The financial ramifications are obvious, the ethical ramifications less so. Just remember that when we are emotionally tied to a course of action, we are at greater risk of rationalizing less ethical behavior while also rationalizing that we “have no choice.” We may not like our choices, but we always have them.
So what’s a person to do? Escalation of commitment to a losing course of action is just another form of bias, and the most powerful thing we can do to eliminate biases in our thinking is to recognize that they exist and then adjust for them. Start by asking yourself “why am I committed to this decision?” Explore whether you are afraid of looking like a failure. Ask yourself, “If this was somebody else’s problem, and I was asked to take it over, would I do it? Could I support it?” Ask somebody else for their opinion, or if they would be willing to take it over.
Removing ego and emotion from decisions is unquestionably difficult. But increasing our investment in something that is ultimately not worth it isn’t easy either.
 
PS – continuing to invest because it might be worth it some day is what people do at casinos.  If you decide to do this, make sure that you’re only gambling with time and money you have no problem kissing goodbye.

(c) Andrea M. Hill, 2007

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One Response to Gambling Permitted at Most U.S. Corporations

  1. Dale says:

    We studied something like this way back when in a management class and at the time it didn’t mean much to me, but it means a lot more once you’ve actually done it and suffered the negative results.

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