Wednesday 6 July 2022

Sunk costs, bankruptcy, and sudden discoveries of principle


Most large organisations fall prey, at some time or another, to the sunk cost fallacy. A project, especially an IT project, in which significant sums of money have been invested over a time fails to deliver on time and on budget, but the argument is made that having already invested £n million, it would be wasteful to not spend just a few £million more to complete the work. And when even that first tranche of extra money fails to bring the project to a conclusion, the process is repeated. At each decision point, the decision to invest a ‘small’ additional sum looks easier and more reasonable than agreeing to write off the much larger sum. And so some projects continue for years in a zombie form; always around 95% complete and never ever coming to fruition because the decision makers are afraid to admit not only that they got it wrong at the first decision point, but also at every subsequent decision point. Their personal investment grows with every wrong decision.

It doesn’t only work in terms of time and money though; in other scenarios, the investment can be in terms of credibility, or reputation. Take the current government as an example. All those Tory ministers and MPs who have been sent out, time and time again, to debase themselves just a little further in defending the indefensible should surely be asking themselves at what point they write off the damage to their reputations and stop digging the hole in which they find themselves. In truth, the sunk cost fallacy tells us that it’s much easier to believe that, with one more act of self-abasement, one more voluntary humiliation, perhaps things can be turned around. If the project turns out successfully as a result, they might just recover some of the reputational damage they have suffered. Two major players (interestingly, both former bankers, presumably familiar with the fallacy) and a handful of minions finally snapped yesterday, and decided to throw no more of themselves into a lost cause. However, most have, thus far, shown themselves willing to continue the self-sacrifice. In the case of those who know that no-one else would ever give them a job in government, they may well be concluding that they have nothing to lose. Even they can occasionally be right about something. As for the rest, those with more than a solitary functioning neuron must surely realise by now that the flow of scandal, untruth and misjudgement emanating from Downing Street isn’t going to stop, not just any time soon, but ever; although the caveat might itself exclude a lot of MPs and ministers as well as explaining their inaction.

Hemingway had one of his characters respond to a question about how he went bankrupt with the words, “Two ways. Gradually, then suddenly.” It’s a concept which doesn’t just apply to bankruptcy; it happens in other contexts as well. When it comes to collapsing governments, we might just be moving from the gradual phase to the sudden phase.

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