Decision-making is difficult. It could make a multi-million dollars business collapse, and it could also make a struggling business become a thriving one. Beyond the business world, we all make decisions every time- whether in relationships, personal choices, family decisions etc., and we are all responsible for our decisions. We can all improve our decisions by knowing and acknowledging some traps in decision-making. One of the traps is Sunk Cost Trap.
Sunk cost trap is making choices that justify past decisions even when the one-time options no longer seem valid. There was a time my former organization took a loan from a bank- the loan became terrible because the business failed. To convince the bank that he could repay the loan, the MD asked for the loan to be restructured and requested an additional working capital loan to finance the business. When the two parties concluded that this wasn’t working, the other loan the company had received was up to 30% of the principal loan. Another example is a lady or a guy in a relationship- for instance, eight years relationship. They both know that the relationship will not take them anywhere, but they keep thinking about the investment they have made in the past and people who have known about the relationship and keep trying to make it work. Hiring a poor-performing team member is another example of sunk cost trap. I was the hiring manager for a role a few years back. We were three people on the panel, and we rated the first candidate as the best, the second as average and the third as poor. The first candidate was asking for 30% more than the second candidate. Because of that, the MD and the HR thought we should go with the second candidate despite the three technical people on the panel disagreeing. We went with the second candidate. From his first day at work, I knew he could not cope with the Job. The MD kept defending him because it would be difficult to admit that the hiring was terrible in the first place. He would rather blame the HR for not onboarding him properly or the line manager for not supporting him enough. At the end of 6 months, the team member resigned from the Job, and we had to start from scratch.
To free yourself from this trap, you must consciously try to free yourself from any sunk cost, whether economic or psychological. Examine why admitting to an earlier mistake distresses you. The most brilliant guys in the world have made wrong choices at some point. The more you dwell on the loss, the more you will likely lose money. The first decision to make is to STOP IT. Remember the words of Warren Buffet “When you find yourself in a hole, the best thing you can do is to stop digging.” Don’t just stop it; stop when you see it reflected in your direct reports’ decisions. Don’t encourage a failure-fearing culture where employees tend to perpetuate their mistakes. In rewarding people, do not look at the outcome but also the quality of their decision-making.
Nature of Human Persons