MGHB02H3 Chapter Notes - Chapter 11.4-11.5: Sunk Costs
11.4 Explain the process of escalation of commitment to an apparently failing course of action
Biases in evaluating the solution: justification and hindsight
Justification
Not carefully evaluating the effectiveness of the decision so the decision will not be revealed as
ineffective
Sunk costs: permanent losses of resources because of the decision; often ignored when making
related decisions after
Escalation of commitment: Escalation of the problem (caused but further investment into the
decision) due to commitment with the decision
oBuying more of the same machines when the previously purchased ones are obviously
faulty; not admitting that the original decision to purchase machines was bad
oManagers want to appear consistent (inconsistency as a weakness)
oProblem is framed as a potential loss vs. guaranteed savings
oGroups are more prone to escalation of commitment
oAvoiding escalation of commitment
Continuously reframe the problem (see savings vs. loss); avoid feeling that you
must be invested
Set goals that must be met before investing more resources
Emphasis on how decisions are made vs. the outcomes
Separate the evaluation of the decision from the decision making (don’t have
the same person who made the decision evaluate it)
Hindsight: tendency to review the decision to see what was wrong/right
Knew-it-all-along effect: memory adjusts itself to fit the probability of what happened
oA risky decision is reviewed as confident/certain after the fact if successful
Taking responsibility for success and placing blame if a failure
11.5 Consider how emotions and mood affect decision making
Emotion is necessary to make good decisions; see how it will impact themselves and others
Mood has most impact on ambiguous decisions
People in positive moods remember positive information and same for negative moods
Positive moods = evaluate positively, same for negative moods
Positive moods = overestimate probability of good outcomes, negative mood = overestimate bad
outcomes
Positive mood = prone to decision shortcuts that lead to error, negative moods = more cautious,
detailed and deliberate decision making
Positive moods = creative, intuitive decisions
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Document Summary
11. 4 explain the process of escalation of commitment to an apparently failing course of action. Biases in evaluating the solution: justification and hindsight. Not carefully evaluating the effectiveness of the decision so the decision will not be revealed as ineffective. Sunk costs: permanent losses of resources because of the decision; often ignored when making related decisions after. Continuously reframe the problem (see savings vs. loss); avoid feeling that you must be invested. Set goals that must be met before investing more resources. Emphasis on how decisions are made vs. the outcomes. Separate the evaluation of the decision from the decision making (don"t have the same person who made the decision evaluate it) Hindsight: tendency to review the decision to see what was wrong/right. Knew-it-all-along effect: memory adjusts itself to fit the probability of what happened: a risky decision is reviewed as confident/certain after the fact if successful. Taking responsibility for success and placing blame if a failure.
