When we make a choice that doesn’t work out, we find it remarkably difficult to cut our losses and walk away.
Polaroid pioneered digital camera technology in the early 1980s, but top executives were so invested in the strategy of making money on selling film—like selling blades for razors—that they stuck to their guns. They ended up releasing their major digital camera in 1996, four years after the prototype was ready, and by that time, more than three dozen competitors had already launched theirs. Escalating commitment to a losing strategy sent Polaroid on the road to bankruptcy, costing many employees their jobs. How can we all escape these escalation traps? To stop escalation, we need to understand what causes it. One factor is sunk costs.
Economists have known for years that we’re irrationally attached to the time, energy, and money we’ve invested in the past. It’s already gone, so it should no longer figure into our judgments, but it does.
It’s like the money the Polaroid executives spent on producing instant film was still burning a hole in their wallets. We’re also sucked in by the desire to finish what we started and the worry that we’ll regret missing out. After all, persistence is a virtue, and those egg rolls do smell delicious…
New evidence reveals that the biggest culprit behind escalation is ego threat. We don’t want to be seen—or see ourselves—as failures.
Rigorous studies support four antidotes to escalation:
(1)Separate the initial decision-maker from the decision evaluator.
In a study of California banks, after clients defaulted on loans, managers tried to turn things around by giving second loans. Having made the initial decision to approve the problem loans, they came to believe that the debtors would come through. This escalation problem was reduced by turnover among senior managers. The new managers had no need to protect their egos and save face: they hadn’t approved the original loans, so they were able to look at them more rationally. They recognized that they should cut their losses by writing off the loans and setting aside funds to cover them.
(2) Create accountability for decision processes, not only outcomes.
Many leaders like the idea of holding people accountable for the results they achieve. That way, employees have the freedom to choose different methods and strategies, and we don’t have to monitor their work along the way. The problem with this approach is that it allows employees to make faulty decisions along the way, convincing themselves that the ends will justify the means. Research demonstrates that long before outcomes are known, asking employees to explain their decision processes can encourage them to conduct a thorough, evenhanded analysis of the options.
(3) Shift attention away from the self.
Once you’ve learned that an initial choice didn’t pan out, your focus immediately turns to your pride and your reputation. Research shows that if you consider the implications of the decision for others, you can make a more balanced assessment.
(4) Be careful about compliments.
When we praise people for their skills, it can go one of two ways. It can reduce escalation by protecting the ego, allowing people to feel good enough about themselves that they’re comfortable acknowledging a mistake. But it can also increase escalation by inflating the ego, causing people to become cocky: they couldn’t have made a mistake. Which way does it go? The answer depends on the domain of praise.
When people were praised for their decision-making skills and then made a choice about whether to keep investing in a bad hire, they were 40% more likely to escalate their commitment than people who received no praise at all.
On the other hand, When people were praised for their creativity, they were 40% less likely to escalate commitment than those who received no praise. Since they felt good about another skill, the failure didn’t sting as much.
A rich body of research shows that when we get positive feedback in the same domain as the failure, we’re at risk for becoming overconfident.