You can't always make the right decision—which means sometimes you've got to make the same decision twice: That didn't work. Walk away or double down?
Business is all about making decisions. How should we spend money? How should we deploy employees? Which items are priorities for this year, month, week and hour?
You can't always make the right decision, either—which means sometimes you've got to make the same decision twice: That bet didn't work. Do you walk away or double down?
It depends on what will happen in the future—not on what you've already sunk into the project.
James Surowiecki has a great, short piece over at The New Yorker on sunk costs—what you've paid for a decision that, in hindsight, wasn't a good decision. In this case, he's using the example of New York Jets quarterback Mark Sanchez.
The most intriguing aspect of sunk costs, as Arkes and others have documented, is that greater investment in a project increases people’s belief that it will succeed. That may help explain what happened last March, when the Jets gave Sanchez a contract extension that guaranteed his salary through 2013. Since Sanchez was already signed for two more years, and was coming off a mediocre season, the extension seemed peculiar to outside observers. But the Jets argued, and doubtless believed, that it was a smart way of locking up a young player. It was a classic case of what psychologists call the “escalation of commitment.”\n
Quarterbacks are told to forget the interception they threw before and just move on with the game. What's the best choice on this play right now? General managers, on the other hand, fear being retroactively judged on their personnel decisions years after making them. But drafting and signing talent in all sports is tricky and everybody knows it. They'd be better off owning that and making forward-looking decisions.
Ah, well—at least Mark Sanchez comes away from all of this with something (er, in addition to several million dollars): His style of decision-making—if not necessarily the substance—is better than that of those who pay his salary.
Photo via Wikimedia Commons.