Decision-Making Traps Part 3: The Sunk-Cost Trap

In our previous posts in this series, we introduced “The Hidden Traps in Decision Making” by John S. Hammond, Ralph L. Keeney, and Howard Raiffa, in which they describe six traps in organizational decision-making that can adversely affect performance. This week’s post covers the third trap, the “Sunk-Cost Trap”, that talks about our deep-seated biases to make choices in a way that justifies past choices, even when the past choices no longer seem valid. These past decisions often involve considering sunk costs in assessing the viability of a project – old investments of time or money that are no longer recoverable. One might also call this “throwing good money after bad.”

Big Sky sees this trap in our clients especially when…switching costs are high or if there are budget constraints. When huge investments have already been made, the team that made that decision tries to justify that decision. In many of Big Sky’s government clients’ large complex IT projects continue to command major investment well after it’s clear to all that the projects have failed. Rather than redirecting investment to better options, some organizations will continue to try to salvage huge IT investment by bolting on functionality or placing band-aids on system issues.

Techniques to overcome:

1. Always be mindful of long-term objectives and examine how they would be served by the status quo, if at all
2. While considering other options, evaluate the status-quo alternative if it was just another option, rather than the front-runner
3. Avoid exaggerating switching costs
4. And finally, always evaluate alternatives in terms of future as well as present context

Our next post in this series will discuss the “The Confirming-Evidence Trap” outlined in the article and will be posted next week.