5.6 Faulty Decision Making

Potential Challenges to Decision Making

Escalation of commitment occurs when individuals continue on a failing course of action after information reveals this may be a poor path to follow. It is sometimes called sunk costs fallacy because the continuation is often based on the idea that one has already invested in this course of action. For example, imagine a person purchases a used car that turns out to need another repair every few weeks. An effective way of dealing with this situation might be to sell the car without incurring further losses, donate the car, or drive it without repairing it until it falls apart. However, many people spend hours of their time and hundreds, even thousands of dollars repairing the car in the hopes that they will justify their initial investment in buying the car.

Example: Motorola’s Iridium Project

A classic example of escalation of commitment from the corporate world may be Motorola’s Iridium project. In 1980s, the phone coverage around the world was weak—it could take hours of dealing with a chain of telephone operators in several different countries to get a call through from, say, Cleveland to Calcutta. Thus, there was a real need within the business community to improve phone access around the world. Motorola envisioned solving this problem using 66 low-orbiting satellites, enabling users to place a direct call to any location around the world. At the time of idea development, the project was technologically advanced, sophisticated, and made financial sense. Motorola spun off Iridium as a separate company in 1991. It took researchers 15 years to develop the product from idea to market release. However, in the 1990s, the landscape for cell phone technology was dramatically different from the 1980s, and the widespread cell phone coverage around the world eliminated a large base of the projected customer base for Iridium. Had they been paying attention to these developments, the decision makers would probably have abandoned the project at some point in the early 1990s. Instead, they released the Iridium phone to the market in 1998. The phone cost $3,000 and it was literally the size of a brick. Moreover, it was not possible to use the phone in moving cars or inside buildings! Not surprisingly, the launch was a failure and Iridium filed for bankruptcy in 1999 (Finkelstein & Sanford, 2000). The company was ultimately purchased for $25 million by a group of investors (whereas it cost the company $5 billion to develop its product), scaled down its operations, and modified it for use by the Department of Defense to connect soldiers in remote areas not served by landlines or cell phones.

 

Why does escalation of commitment occur? There may be many reasons, but two are particularly important.

First, decision makers may not want to admit that they were wrong. This may be because of personal pride or being afraid of the consequences of such an admission. Second, decision makers may incorrectly believe that spending more time and energy might somehow help them recover their losses. Effective decision makers avoid escalation of commitment by distinguishing between when persistence may actually pay off versus when persistence might mean escalation of commitment. To avoid escalation of commitment, you might consider having strict turning back points. For example, you might determine up front that you will not spend more than $500 trying to repair the car and will sell the car when you reach that point. You might also consider assigning separate decision makers for the initial buying and subsequent selling decisions. Periodical evaluations of an initially sound decision to see whether the decision still makes sense is also another way of preventing escalation of commitment. This becomes particularly important in projects such as the Iridium where the initial decision is not immediately implemented but instead needs to go through a lengthy development process. In such cases, it becomes important to assess the soundness of the initial decision periodically in the face of changing market conditions. Finally, creating an organizational climate where individuals do not fear admitting that their initial decision no longer makes economic sense would go a long way in preventing escalation of commitment, as it could lower the regret the decision maker may experience (Wong & Kwong, 2007).

Perform a Project “Premortem” to Fix Problems Before They Happen

Doctors routinely perform postmortems to understand what went wrong with a patient who has died. The idea is for everyone to learn from the unfortunate outcome so that future patients will not meet a similar fate. But, what if you could avoid a horrible outcome before it happened by identifying project risks proactively—before your project derails? Research suggests that the simple exercise of imagining what could go wrong with a given decision can increase your ability to identify reasons for future successes or failures by 30% (Mitchell, et. al., 1989). A “premortem” is a way to imagine and to avoid what might go wrong before spending a cent or having to change course along the way (Breen, 2000; Klein, 2003; Klein, 2007; Pliske et al., 2001).

Gary Klein (2003), an expert on decision making in fast-paced, uncertain, complex, and critical environments, recommends that decision makers follow this six-step premortem process to increase their chances of success.

1. A planning team comes up with an outline of a plan, such as the launching of a new product.
2. Either the existing group or a unique group is then told to imagine looking into a crystal ball and seeing that the new product failed miserably. They then write down all the reasons they can imagine that might have led to this failure.
3. Each team member shares items from their list until all the potential problems have been identified.
4. The list is reviewed for additional ideas.
5. The issues are sorted into categories in the search for themes.
6. The plan should then be revised to correct the flaws and avoid these potential problems.

The premortem technique allows groups to truly delve into “what if” scenarios. For example, in a premortem session at a Fortune 50 company, an executive imagined that a potential billion-dollar environmental sustainability project might fail because the CEO had retired.