Sunk Cost Bias, Example & Decision-Making in Business

Image from thenewdaily.com.au

HEURISTICS

Decision-making is an inherently complex process that involves a significant amount of cognitive effort. If a rational mind has to get involved in making a decision, it would consume a lot of energy in performing those cognitive tasks because of the ‘working memory’ limitations. This would impart a feeling of fatigue. In other words, our ‘mind system’ is naturally against rational decisions.

“Sometimes the fault lies not in the decision-making process but rather in the mind of decision maker” -John S. Hammond

Sunk Cost Bias is one of the heuristics that influence decision-making and has the potential to wreck the businesses.

THE SUNK COST

Once, I and my wife have booked tickets for a new Malayalam movie. A couple of hours before the movie time, we went through the movie reviews and it was really bad and scary.

INTEL‘S EXIT FROM MEMORY TO MICROPROCESSORS

In the early 1970s, Intel was nearly a monopoly in manufacturing and supplying memory chips(DRAMs). The company ruled the market and memories had become Intel’s identity.

SUNK COST BIAS IN DECISION-MAKING

Intel was founded and built on memories. The people of Intel grew along with the company. Memory Chips had become their identity. They had invested a lot of their time, mental energy, emotion and money in learning, training and developing skills related to memories. People in the manufacturing and production sector had developed and refined their technologies on memory products.

The more you invest in something the harder it becomes to abandon it.

The sunk cost bias preyed on the minds of Andrew Grove and other executives. To save the investments, they were adding additional funds to build infrastructure, buy special purpose machinery, provide additional training to employees to improve the quality of memory chips. A classic case of making choices to justify past choices, unconsciously protecting their earlier flawed decisions.

OVERCOMING SUNK COST BIAS

How did they overcome Sunk Cost Bias?

LISTEN

One of the ways to escape Sunk Cost Bias is to understand that other people will not see the problem from the same perspective as we do. Once you knew it, you need to seek out different perspectives of the problem. This would help you to reframe the problem.

FEARLESS CULTURE

We have already seen that one of the strong reasons for ‘Sunk Cost’ Bias is a person’s unwillingness to admit that he or she had made a mistake.

CONCLUSIONS

Many other heuristics play a major role in influencing our decisions and the choices we make. Sometimes they all work together, amplifying the errors in the decision. Most of our decisions are prone to these biases. The first step in protecting our decisions is to be aware of the various cognitive biases that reside in our brain.

Forewarned Is Forearmed -John S Hammond.

References: The Hidden Traps in Decision Making — HBR article by John S. Hammond, Ralph L.Keeney, Howard Raiffa, Thinking Fast and Slow by Daniel Kahneman, The Art Of Thinking Clearly by Rolf Dobelli, Only The Paranoid Survive by Andrew S Grove.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store