Friday, July 26, 2019

Your Decision-Making Abilities are Terrific! Uh-oh... such praise can be problematic.

Source: Flickr
I've written extensively about the sunk cost problem.  We have a hard time letting bygones be bygones in business and in life.  Worse than that, we throw good money and effort after bad.  Psychologists call this phenomenon the escalation of commitment.   We would like to believe that we are not vulnerable to this decision-making trap, but most of us will encounter it no matter our intelligence, experience, or expertise. Recently, I happened upon a 2008 study by Niro Sivanathan and colleagues. The article was titled, "The promise and peril of self-affirmation in de-escalation of commitment."  It has some interesting new lessons regarding the sunk cost trap.  

The authors conducted a series of interesting experiments.  In one study, they gave some participants information that affirmed their abilities, but these skills were not relevant to the decision at hand.  For other participants, they gave them information that affirmed their decision-making abilities.  They told them, "Your decision-making orientation suggests that you possess the ability to decode and analyze complex data with ease. More often than not, you are able to use the analyzed data to make a sound and profitable decision.”   Naturally, they also had a control condition in their experiment.  What did they find?  The authors write, "Following a poor managerial decision, individuals who received feedback affirming an important ability that was directly related to this decision (decision-making abilities in Study 3, Hypothesis 3B) showed increased escalation of commitment to their decision."  

What's the lesson here?  I think we can now realize why people who have been highly successful in the past can find themselves in the sunk cost trap.  They have made a series of wonderful decisions in the past, and they probably were praised mightily for their decision-making abilities.  However, that may make it quite difficult to admit errors moving forward.  Therefore, they may find themselves unwilling to walk away from bad decisions, and indeed throwing good money after bad in a failing situation.  

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