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The Sunk Cost Fallacy Applies to People
Of the many biases leaders fall prey to, perhaps none is more common than the Sunk Cost Fallacy. This insidious error refers to the tendency for leaders to follow through on something if they have already invested a lot of time, energy, or money into it. They do this even when the cost-benefit is no longer in their best interest, so as to not to forfeit the investment they have already made. Academics who study decision-making like to point out how easy it is for leaders to slip into the trap of the Sunk Cost Fallacy and how it undermines quality decisions in the process.
Often hidden from view, Sunk Costs play an even larger role regarding personnel decisions. Leaders commonly continue to invest in team members who have proven they do not have the skills, talent, or learning agility to succeed in their roles. They push off the hard decision of accepting this reality, less because they fear the discomfort or implications of making a change, but rather because they have invested an inordinate amount of time and resources into making this team member successful.
To admit late in the game that they made a bad call and to lose the investment is too painful, so leaders often double-down and invest even more. This is not just a bad decision, it also demoralizes other team members who can plainly see what is going on.
The best leaders remain fully aware and vigilant regarding the Sunk Cost Fallacy. They know pulling the plug on a team member should never occur a moment too soon or too late. They guard against the fallacy by ignoring past investments and assessing performance independently of the resources used to make others better.
The question all great leaders ask of their people is simple: Can you be successful right now? Investing in talented people who need some help is smart. Continuing to invest in those who can’t succeed reflects not only faulty judgment but also an unhealthy look backwards at money or resources already spent.
The fact is leaders rarely suggest they should have waited longer to give up on a suspect talent, but they often lament taking too long to make such a call. Time (and other resources) is of the essence. Invest it wisely.