Thursday, July 21, 2011

Sunk cost and the rear view mirror

Sunk cost: "everyone knows" that decisions are not to be made on the basis of trying to salvage sunk costs. The saying goes: what's done is done; decisions are to be made about options in the future. The past is past.

Well, if humans were robots, following that rule would be no big thing. But of course it's not that way, and what's more, we know it.

Now into the "sunk cost" arena comes another bias to add to the list: "continuation bias". The first I heard about it was in a post last month from our friends at Dark Matter: "flying in the rear view mirror". I quote:
Plan continuation bias is a recognised and subtle cognitive bias that tends to force the continuation of an existing plan or course of action even in the face of changing conditions

Of course there are other variants to this: "Continuing to do the same thing and expect a different result is nonsense", and other formulations.

Even Glen Alleman recently got into the act with a quote of Fitzgerald's First Law of Program Success:
There are only two phases to a big program: Too early to tell and too late to stop.

Program advocates like to keep bad news covered up until they have spent so much money that they can advance the sunk-cost argument;

that it’s too late to cancel the program because we’ve spent too much already.

Buy why?

It's relatively simple: we hate to lose, and most important we had to lose what we had. People who study these things say it's more than just anecdotal that we are very averse to risking what we have: thus, a utility response that is quite non-linear. We weight a loss, particular a loss of from a reference point of achievement, much more so than we favor a gain from the same reference.

Such reference point adjustment is the basis of a utility concept called "prospect theory". Originally formulated in the financial community, it easily extends to project management. It's a cousin of adjustment or anchor bias. Once we reach a pinnacle, the new height becomes the reference for subsequent measurements of loss.

And sunk cost is the cost to reach the pinnacle. If we can go no farther, or if continuing the same plan only gets us regression, we keep hoping things will change and we'll get back to where we were.

Might happen; might not. Continuation bias: beware!

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