How to Escape from Bad Decisions
Four key steps to avoid throwing good money after bad
Posted Jul 09, 2013
When we make a choice that doesn’t work out, we find it remarkably difficult to cut our losses and walk away. Think about the last time you waited for 45 minutes at a restaurant, and there was no sign that your table would be ready in the near future. You should have probably headed to another restaurant, but you’d already waited 45 minutes, so how could you leave?
Or you hired an employee who struggled to master the key skills for the job, and after several months of training and coaching, things hadn’t improved. You rotated him to two different positions that seem like a better fit, and he underperformed there too. Three years later, it’s probably time to encourage the employee to start looking elsewhere, but after putting so much energy into him, can you really give up on him?
If you kept waiting at the restaurant or working with the employee, you fell into a trap that organizational behavior expert Barry Staw calls escalation of commitment to a losing course of action. It’s throwing good money after bad, and we see it all around us. Escalation occurs whenever we invest our time, energy, or resources in a choice that falls short of the desired return, and we succumb to the temptation to invest more.
Sometimes it merely costs us a few hours, but in other cases, the consequences of escalation are more disastrous. Polaroid pioneered digital camera technology in the early 1980s, but top executives were so invested in the strategy of making money on selling film—like selling blades for razors—that they stuck to their guns. They ended up releasing their major digital camera in 1996, four years after the prototype was ready, and by that time, more than three dozen competitors had already launched theirs. Escalating commitment to a losing strategy sent Polaroid on the road to bankruptcy, costing many employees their jobs. How can we all escape these escalation traps?
To stop escalation, we need to understand what causes it. One factor is sunk costs. Economists have known for years that we’re irrationally attached to the time, energy, and money we’ve invested in the past. It’s already gone, so it should no longer figure into our judgments, but it does. It’s like the money the Polaroid executives spent on producing instant film was still burning a hole in their wallets. We’re also sucked in by the desire to finish what we started and the worry that we’ll regret missing out. After all, persistence is a virtue, and those egg rolls do smell delicious…
New evidence reveals that the biggest culprit behind escalation is ego threat. We don’t want to be seen—or see ourselves—as failures. If you just invest a bit more in that underperforming employee, you can save face and protect your ego, convincing your colleagues (and yourself) that you were right all along. Staw and colleagues found that in NBA basketball, after controlling for players’ performance on the court, those who were picked earlier in the draft were given more playing time and were less likely to be traded. Regardless of players’ offensive and defensive success on the court, when executives made bigger bets on players, they had a harder time giving up on them, as that would mean conceding a blunder. So what we can do about it?
Rigorous studies support four antidotes to escalation:
(1) Separate the initial decision-maker from the decision evaluator. Once you’ve made the initial choice to go to the restaurant or hire the employee, you’re no longer in a neutral position to decide whether to keep investing in that course of action. Since you’re biased in favor of sticking with the slow restaurant, the old car, and the underperforming employee, it’s valuable to delegate the decision to someone who can take an unbiased look at the facts.
In a study of California banks, after clients defaulted on loans, managers tried to turn things around by giving second loans. Having made the initial decision to approve the problem loans, they came to believe that the debtors would come through. This escalation problem was reduced by turnover among senior managers. The new managers had no need to protect their egos and save face: they hadn’t approved the original loans, so they were able to look at them more rationally. They recognized that they should cut their losses by writing off the loans and setting aside funds to cover them.
(2) Create accountability for decision processes, not only outcomes. Many leaders like the idea of holding people accountable for the results they achieve. That way, employees have the freedom to choose different methods and strategies, and we don’t have to monitor their work along the way. The problem with this approach is that it allows employees to make faulty decisions along the way, convincing themselves that the ends will justify the means. Research demonstrates that long before outcomes are known, asking employees to explain their decision processes can encourage them to conduct a thorough, evenhanded analysis of the options.
Process accountability can be applied to our own choices, too. It just means setting some criteria for the decision process in advance. Before arriving at the restaurant, you might agree that you’ll only wait for 30 minutes. Prior to choosing an employee to hire, you could decide how much training this position should receive.
(3) Shift attention away from the self. Once you’ve learned that an initial choice didn’t pan out, your focus immediately turns to your pride and your reputation. Research shows that if you consider the implications of the decision for others, you can make a more balanced assessment.
In Mistakes Were Made (But Not By Me), psychologists Carol Tavris and Elliot Aronson present a chilling analysis of how police officers and prosecutors reject airtight DNA evidence that proves the innocence of people they imprisoned. It’s painful to look in the mirror and admit that they punished an innocent person. If they focused more on the good they could do for the wrongly convicted people and their families, they might be more open to the possibility that they made an error.
(4) Be careful about compliments. When we praise people for their skills, it can go one of two ways. It can reduce escalation by protecting the ego, allowing people to feel good enough about themselves that they’re comfortable acknowledging a mistake. But it can also increase escalation by inflating the ego, causing people to become cocky: they couldn’t have made a mistake. Which way does it go?
The answer depends on the domain of praise. In one experiment, when people were praised for their decision-making skills and then made a choice about whether to keep investing in a bad hire, they were 40% more likely to escalate their commitment than people who received no praise at all. They were great decision-makers, so how could they have chosen the wrong candidate?
On the other hand, when people were praised for their creativity, they were 40% less likely to escalate commitment than those who received no praise. Since they felt good about another skill, the failure didn’t sting as much. A rich body of research shows that when we get positive feedback in the same domain as the failure, we’re at risk for becoming overconfident. If you’re about to compliment someone who’s at risk for escalation, target the compliment to a different skill set or a different sphere of life. If you’re worried that you might be on the road to escalation, affirm your skills or values in a domain that’s completely removed from the context of the current decision.
I once served on a board of directors that committed $10,000 for a team to create a pilot for a TV show about the Let’s Go travel guidebooks. The pilot flopped, and I was dumbfounded when a senior board member said: “We didn’t invest enough. Let’s give them a bigger budget of $50,000.” The next pilot was no better, and the show never got off the ground.
Looking back, that board member never should have been involved in the decision: the initial investment was his idea. And before investing the first $10,000, we should have established process criteria for evaluating the decision at the next stage. Since we failed in those two structural steps, I wonder what would have happened if I had complimented the board member’s creativity, and highlighted how that money could be better spent to benefit the organization.
By investing in the TV pilot, we passed on the opportunity to have the Let’s Go books prominently featured in a movie called Eurotrip. The movie’s executives partnered with Frommer’s instead, and Eurotrip ended up grossing over $20 million in revenue.
For more on making good decisions, see Adam's new book Give and Take: A Revolutionary Approach to Success, a New York Times and Wall Street Journal bestseller. Follow Adam on Twitter @AdamMGrant and LinkedIn at www.linkedin.com/influencer/profadamgrant