Wednesday, August 5, 2015

Econ humor is not oxymoronic

"I've spent too much energy combating the sunk cost fallacy to give up now."


  1. Humor aside, this line actually helps to show that the sunk-cost concept is meant not to emotional Rather, you want to focus on the cost-benefit from this point onward and not looking backward or with emotion. It is human nature to want to satisfy our emotional or rational reasoning.

    Recently here at work, the IT team has deployed the latest and newest collaborative tool called Yammer, a social medium of sorts that allows employees to easily share information each other. Clearly, the firm has made an investment in this new software, and executives have been encouraging staff to use it. I found myself pushing my staff and myself to use the tool to justify the firm’s investment. Unfortunately, I’m not seeing my team fully engaged with the tool.

    Applying the concept of the sunk-cost fallacy in a loose manner (if you’ll allow me), I am now realizing that I became focused on trying to justifying the firm’s investment which is now become a sunk cost really. What has been built and deployed is done. Instead, I should be preaching the benefits of the system itself and thinking how it can benefit my team. I am thinking I will have much more success if I explain with actual benefits and examples, rather than applying an emotional guilt trip of “the big boss is using this, so should we.”

    1. I am going through the exact same issue! I agree, it’s time to discuss the benefits of this launch rather than harp on the costs. As a society we have absolutely no problem justifying Facebook, but social media in the workplace seems to spook everyone. The truth is many cost benefits exist as a result of utilizing these collaborative tools. For instance it offers the opportunity for employees to identify and share customer trends or concerns, quicker than ever. It gives front line employees an avenue to present new ideas or to offer suggestions on how to increase process efficiency. We can also diagnose an issue before it becomes a big a costly issue. These tools offer us the opportunity to constantly improve, a cost benefit for certain. I am certain that the decision to implement this system started with the idea that we would see cost benefits as the result of increased efficiencies. Don’t get confused by costs, the goal is to make the decision that increase profits.

  2. All too often we focus on project costs and not enough on how the product/project implementation will impact the business as a whole. While this sounds like old school thinking, we focus all to many times, on how "awesome" the product is and how much benefit it will bring to the company in allowing us to collaborate and bring ideas to the forefront of management. I'm sorry, but I don't subscribe to this theory and believe that many times we implement social media and collaborative tools as a result of drinking supplier's "Kool-Aid" too much.
    Everyone is looking to be more efficient and profitable but sometimes we get hooked on products that look good on paper but are so disruptive to the business that they lose their benefit. Case in point, we tried implementing a small technical collaborative product called Confluence. Because of the staffs age and experience diversity nearly half wouldnt use it and found it too cumbersome. Some went as far to study how much time it was taking to maintain the site and process and showed how our old method of good old face to face and group meetings worked better and was less expensive.
    Unfortunately we had a huge amount invested both emotionally and financially, so we opted to keep funding it , throwing good money on top of bad and never fixing the underlying issue of culture.
    The lesson we learned is that we were both afraid and embarrassed to pull the plug on it as the sunk costs were high and we were afraid of being labeled as failures. Instead we keep funding, don't get 100% usage or anywhere close to it and have two ways of collaborating which is not efficient.

    So...what was more of a project failure, shutting it down when we realized he issue or brute forcing it and funding it more hoping it would fix itself?

  3. You are correct sometimes these extremely costly products look great on paper, but are not worth the same paper that they are written on. It does come down to culture at times also. Obviously fear of change and general resistance takes over at times, but sometimes the product just does not make sense for its intended purpose or audience. It’s just not relevant or it’s what I like to call “a nice to have”, but not really needed or intuitive enough to actually serve a purpose. It seems obvious that someone was sold a bag of goods when actually someone really thought all of this out, they really thought this ultimately useless product would improve efficiency. They thought their decision would have a positive financial impact on the organization, instead they had buyer’s remorse!

  4. The fixed-cost fallacy or sunk cost-fallacy means that you consider costs and benefits that do not vary with the consequences of your decision. In other words, you make decisions using irrelevant costs and benefits (Froeb, ET all, pg. 32). I think the sunk cost fallacy just makes people act insanely at times. Too often an internal product is launched with great intentions but does not work out at all, we can’t recoup the investment but we also don’t move on. Organizations hang on to the product for way too long, often suffering through many different versions that also fail. Sometimes metrics are put in place to track usage or the lack thereof, it becomes insane at times. I think we have all lived through this. I am sure that we have all asked the same question “why don’t we dump this and move on?”, and I think we have all heard the same answer “the company has invested too much money in it”. Am I wrong or am I right, does the sunk cost fallacy make us act insane at times?
    Froeb, L.M., McCann, B.T., Ward, M.R. & Shor, M. (2014). Managerial Economics: A Problem Solving Approach. Mason, Ohio: Southwestern Cengage Learning.

  5. "I've spent too much energy combating the sunk cost fallacy to give up now." – unfortunately, working with design and construction contracts as I do in my position with my current employer, I have seen a few examples of the sunk-cost fallacy where decisions were made to continue a project because they felt they needed to get their money’s worth. Choosing to focus on the money spent, decisions were made using irrelevant costs and benefits of continuing on with the projects. I believe that some of these decisions could have been avoided by not letting emotions of time and money invested continue to cloud the judgement of those making the decisions to stay or go.