• People rationalise past actions when faced with evidence contradicting prior choices
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Most of us justify sticking to failed projects because stopping would render meaningless all the previous investments in time, money and energy.
"Let us put a little bit more effort into this and it will succeed." If you are using this line to explain something in your life, you probably already know you are in trouble. You are falling into the "sunk costs" trap.
It is not only ordinary men and women who fall into that fallacy. It's a trap that has captured renowned corporate heads, world leaders and military commanders.
Companies keep allocating money into unviable ventures simply because of the money already spent. Politicians push public funds into questionable projects conceived in the excitement of election campaigns.
The sunk cost fallacy describes our tendency to follow through on an endeavour if we have already invested in it, whether or not we are getting any benefits. In economic terms, sunk costs cannot be recovered. Committing to sunk costs leads many people to making decisions on the basis of the past instead of future and present gains.
The commitments prone to the sunk cost fallacy extend beyond business projects and into romantic relationships, career choices, renting or building a home and day-to-day consumer decisions. For example, someone buying a flatscreen TV might realise that it's of poor quality, but the buyer chooses to bear with it because of the money already spent.
"As negative feedback emerges or external conditions change, successful leaders learn and adapt. Unfortunately, far too many leaders stick to outdated strategies for far too long," Prof Michael Roberto, a management expert, says.
"People rationalise past actions when faced with evidence that contradicts prior choices. This self-justification may lead people to commit further resources to a particular course of action despite poor results," Roberto wrote in the Ivey Business Journal.
On the other hand, there's something to be said for persistence and determination to see things through, right? There are many stories of people and organisations that survived very difficult periods before achieving success.
Perhaps it is such stories that motivate people to invest in failing ventures with the expectation of a triumphal outcome. While persistence is a good characteristic, it should not stop people from admitting their mistakes and learning from them.
Among Roberto's recommendations for decision makers is to consider the opportunity costs of continued investment in an unviable activity. What opportunities are you missing out by sustaining a failing venture? What alternative uses might exist for the physical and financial assets being invested into the project? If you are a leader, what else could you be doing with the talented people deployed to manage that project?
Angel Mgawe, a business development manager, believes that the decision of whether or not to continue a failing venture should be guided by rationality. In business, rationality refers to maximising profits by carefully considering all possible options before making a decision.
"You should only consider future costs, not past ones. Past costs are sunk costs and can't be recovered," Mgawe says.