Sunk-Cost Fallacy – or why we cannot let projects go
The beginning of a new year is a great opportunity to analyse our portfolio of projects and other activities whether there are some of them that should be cancelled. Sometimes we invest time, funds and energy in projects and they still do not come to end. What makes the situation worse is that we do not dare to “kill” the project and continue investments. This is called the “Sunk-Cost Fallacy”, which is explained as reasoning that further investment is warranted on the fact that the resources already invested will be lost otherwise. People do not take into account the overall losses involved in the further investment. The people´s thinking might be: “X has already been invested in project Y; Z more investment would be needed to complete project Y, otherwise X will be lost. Therefore, Z is justified.”
What prevents us from letting these unfinished projects go is a short-term focus. Changing the perspective to long-term it may let the people think: “we invested already a lot in this project, the outcome is not according to our expectations and the benefit-cost-ratio is not acceptable”. We look back, instead of looking into the future and ask ourselves: “How much invest is necessary to finish the project according to our expectations… and is it still worth of completing it?”. Optimism bias may kick in and we ignore additional risk or cost associated with finishing the project. We are emotionally bound to the project, do not want to lose face to others because we are seen responsible for success or failure of the project.
What prevents the Sunk-Cost Fallacy? We should clearly separate the decision making of projects and personal interests… A steering committee (several people with a variety of interests and perspectives) should decide upon the continuation of projects based on a set of transparent criteria and a systematic analysis of progress made in projects. In this committee it´s also important to avoid “Groupthink”, a “psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative viewpoints by actively suppressing dissenting viewpoints, and by isolating themselves from outside influences.”
The effect of “Sunk-Cost Fallacy” is that we continue riding “dead horses”, potentially wasting money, blocking resources, which are not available to other, strategically more important projects, and leading people into a frustration over not really moving forward. A proper analysis from a project portfolio level perspective may help to see this happening and offering a different perspective and guidance for the decision makers. A Project Management Office (PMO) should point to those projects and ask very tough questions to the owners, sponsors or stakeholders still identifying themselves with progressing such projects. It may free resources, funds and energy for other, more important projects. It may also set a good example for other projects, clearly analysing their status and performing a decision-making that is bound to factual criteria and not individual emotions.