By Davin Wilfrid, insiderRESEARCH
J.D. Drew might be the least popular Red Sox player in history. It's not that he's a bad player -- it's that he's probably not worth his $14 million per year salary, which many hard-working fans consider a personal affront. Listening to a local sports talk radio show a few days ago, I heard a caller insist that Drew should be benched in favor of a promising young outfielder named Josh Reddick.
"You can't bench J.D. Drew. He makes too much money to sit on the bench," the host replied.
Leaving aside the merits of the argument*, the host's response illustrates a psychological quirk that affects the decision-making process not only in baseball, but in the space program, war policy, and ERP projects.
The sunk cost fallacy was first described in the early 1980s by researchers at Ohio University. They found that people who had purchased season tickets to the theater were more likely to go to plays than those who had not -- regardless of whether they actually wanted to see the plays. In other words, spending unrecoverable money propels people to make irrational decisions.
In an article in the MIT Tech Review, space policy expert John Logsdon argues that the space shuttle program was poorly managed in part because of the sunk cost fallacy:
NASA only slightly overran development costs, which is normal for a challenging technological effort, but the cost of operating the shuttle turned out to be at least 20 times higher than was projected at the program's start. The original assumption was that the lifetime of the shuttle would be between 10 and 15 years. By operating the system for 30 years, with its high costs and high risk, rather than replacing it with a less expensive, less risky second-generation system, NASA compounded the original mistake of developing the most ambitious version of the vehicle. The shuttle's cost has been an obstacle to NASA starting other major projects.
It's not just monetary costs that influence irrational decisions either. A soon-to-be published report in the Journal of Experimental Social Psychology says reports of soldiers killed in an overseas war are more likely to boost support for the war than turn us against it. Many Americans don't want to pull out of those wars, the researchers found, for fear that our troops have died for nothing.
ERP projects are vulnerable to the same basic flaw in reasoning. Rather than ending or dramatically changing course on a project, many companies will plow ahead, reluctant to have "wasted" the money (sometimes millions) already spent. Scroll through a selection of blog posts by Michael Krigsman, CEO of Asuret and leading chronicler of IT project failures, and you'll see evidence of the sunk cost fallacy springing up like dandelions.
So how does an organization combat the sunk cost fallacy? By emulating another important figure in the Boston Red Sox organization -- General Manager Theo Epstein. In his 9 years in office, Epstein has developed a reputation for stone-cold calculation. He has released fan favorites and traded promising prospects in a manner some deride as emotionless and even manipulative. However, with two World Series rings (and counting?) it's tough to argue with the results.
*Drew's numbers are down this year (OPS+ 81), but he's always been better in the second half of the season. Reddick may be a fine player in the near future, and he's been terrific in limited action so far this year (OPS+ 195), but Drew's proven abilities should keep him in the starting lineup for the near term. Just one unbiased opinion (I'm a Mets fan).