Don’t fall for the Sunk Cost Trap

Earlier this week, Glen Alleman – author of the brilliant Herding Cats blog – posted this quote of the day:

Fatalism

This is an example of a dangerous kind of fatalism that anticipates that a project going wrong, or not as valuable as originally envisaged, or no longer relevant in the current environment, cannot be stopped.  It’s the danger of momentum And it’s particularly prevalent in the public sector, here in the UK and, it seems, in the us too.

The Danger of Momentum

The danger of momentum is that, once a project gets started – often with big fanfare and good reason, it is hard to stop it.  Yet things change; shift happens.  And there may come a time when people around the project are wondering what it is for.  It is using resources, taking up time and spending money and people are increasingly wondering: “can it succeed?” or “is it still relevant?” It is like an emperor whose clothes are gradually falling off.

A Public Sector Problem?

In the UK public sector, this problem was so great that the Government’s project management process, PRINCE2, sets out a mandatory gateway process for all publicly funded projects.  The trouble is that too many projects by-pass this step or treat it as a mere formality rather than as a way to properly evaluate the project.

The Gateway Process

At a gateway (or gate, or stage-gate), the presumption of must be to “stop unless …” and then to examine whether the evidence supports further investment in the project.

Kissing Gate Stile by eamoncurry123

The alternative, “continue unless …” is not a real gateway – the metaphor falls.   This is just a short pause in the project, and the momentum will almost certainly carry it on into more spending, more depletion of resources and potentially, more waste.

Always evaluate future spending against future benefit.

The Sunk Cost Fallacy

Any evaluation that focuses on the past, and how much we have already spent must, necessarily, open us up to the sunk cost trap: continuing because “we have invested too much to stop now.” But in truth, if we have invested £999,999 and it will only take £1 to finish the project; if the project will not produce £1 of benefit, then that would be £1 wasted.  As my dad used to say: “good money after bad.”

Why do we fall into the Sunk Cost Trap?

Usually because it’s not just cash we have sunk, but our reputation too.  And, in the case of too many public sector projects that should get canned, it is the politicians who cannot bear the loss of face.  They have sunk too much of their political capital.  Now they are putting loss of face ahead of good governance.

… or am I just being cynical?

The “so what?”

Don’t let your project fall into the sunk cost trap.  Establish a robust gateway process, where progress, future benefits, and levels of confidence are reviewed objectively at key points, and formal approval must be obtained before proceeding.

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