|Source: Rand Corporation|
I'm reminded of this quote when I think about an organization I've been studying for quite some time. This once very successful organization made a series of strategic decisions more than a decade ago based on a core set of beliefs and assumptions. Those beliefs and assumptions were consistent with the strong preferences of senior leaders - i.e., they aligned quite well with the interests and aspirations of top managers and board members. Years later, quite a bit of evidence suggests that some of those assumptions were invalid. Yet, leaders remain stubbornly attached to those beliefs. They haven't been willing to confront the data, question those beliefs, and change course.
Poor governance practices have exacerbated the problem, as board members prefer not to question the assumptions or the strategy, given that some of the initiatives were "pet projects" in which they were emotionally invested. Less than desirable outcomes and results are constantly rationalized away, much like a retailer that explains away its poor financial results during a particular quarter by pointing to "weather conditions" that reduced traffic to its stores. Funny how quarterly financial reports never seem to talk about favorable weather conditions bolstering sales and profits!
Perhaps the most frustrating element of this story is that the stubborn attachment to existing beliefs has not only led to an unwillingness to change direction or abandon misguided plans, but has led to a "doubling down" on failed policies. The sunk cost trap is clearly at play. The organization finds itself throwing good money (and effort) after bad. The problem, as is often the case, is not simply the prior investment of financial resources. It's the huge emotional sunk cost; it's the unwillingness to admit when one is wrong.
Whenever you witness the sunk cost trap in action, you should not only pay attention to the wasted resources as good money is thrown after bad. One should also pay close attention to the opportunity costs. What opportunities have been missed and what investments have NOT been made because so many resources continue to be allocated based on a stubborn attachment to long-held beliefs and assumptions? In this particular organization I've studied, the opportunity costs in many ways have been far more substantial than the actual expenditures wasted in support of invalid beliefs and assumptions.
Has your organization found itself in this predicament? How can you as a leader help to identify implicit and explicit assumptions and beliefs that need to be tested, challenged, and validated? How can you protect against the stubborn attachment that Wohlstetter wrote about so eloquently nearly sixty years ago?