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Barry Staw is a world-renowned organisational behavior professor at the University of California at Berkeley, and he has spent his career trying to understand why people make bad decisions in organizations. In an ingenious study, Staw and Ha Hoang collected data on all 240-plus players who were picked in the first two rounds of the NBA draft between 1980 and 1986, in hopes of seeing what effect draft position had on a player's career. They measured each player's performance with a series of different metrics: scoring (points per minute, field goal percentage, and free throw percentage), toughness (rebounds and blocks per minute), and quickness (assists and steals per minute). Staw and Hoang controlled for each player's performance on all of these metrics, as well as for the player's injuries and illnesses, whether the player was a guard, forward, or center, and the quality of the player's team based on win/loss records. Then they examined how much time on the court the players received and how long their teams kept them before trading them, to see if teams made the mistake of overinvesting in players just because they drafted them early.
The results produced a devastating conclusion: teams couldn't let go of their big bets. They stuck with the players whom they drafted early, giving them more playing time and refusing to trade them even if they played poorly. After taking performance out of the equation, players who were drafted earlier still spent more minutes on the court and were less likely to be traded. For every slot higher in the draft, players were given an average of twenty-two more minutes in their second season, and their teams were still investing more in them by their fifth season, when each draft slot higher accounted for eleven more minutes on the court. And for every slot higher in the draft, players were 3 per cent less likely to be traded.
This study is a classic case of what Staw calls escalation of commitment to a losing course of action. Over the past four decades, extensive research led by Staw shows that once people make an initial investment of time, energy, or resources, when it goes sour, they're at risk for increasing their investment. Gamblers in the hole believe that if they just play one more hand of poker, they'll be able to recover their losses or even win big. Struggling entrepreneurs think that if they just give their startups a little more sweat, they can turn it around. When an investment doesn't pay off, even if the expected value is negative, we invest more.
Economists explain this behavior using a concept known as the "sunk cost fallacy": when estimating the value of a future investment, we have trouble ignoring what we've already invested in the past. Sunk costs are part of the story, but new research shows that other factors matter more. To figure out why and when escalation of commitment happens, researchers at Michigan State University analyzed 166 different studies. Sunk costs do have a small effect - decision makers are biased in favor of their previous investments - but three other factors are more powerful. One is anticipated regret: will I be sorry that I didn't give this another chance? The second is project completion: if I keep investing, I can finish the project. But the single most powerful factor is ego threat: if I don't keep investing, I'll look and feel like a fool. In response to ego threat, people invest more, hoping to turn the project into a success so they can prove to others - and themselves - that they were right all along.
In one study led by Staw, when California bank customers defaulted on loans, the managers who originally funded the loans struggled to let go and write off the losses. "Bankers who have been closely associated with decisions to fund problem loans are the ones to show the greatest difficulty in acknowledging the subsequent risks of these loans and the likelihood of default," Staw and colleagues write. The study showed that when managers who originally funded the problem loans left the bank, the new managers were significantly more likely to write the loans off. The new managers had no personal responsibility for the problem loans, so their egos weren't under threat; they didn't feel compelled to justify the original decisions as wise.
Research suggests that due to their susceptibility to ego threat, takers are more vulnerable to escalation of commitment than givers. Imagine that you're running an aircraft company, and you have to decide whether or not to invest $1 million in a plane that's invisible to radar technology. You find out that the project is not doing well financially, and a competitor has already finished a better model. But you have made significant investments: the project is 50 percent complete, and you have already spent $5 million and eighteen months working on it. How likely are you to invest the extra $1 million?
In this study by Henry Moon at London Business School, before making their investment decisions, 360 people completed a questionnaire that included giver statements such as "I keep my promises" and taker statements such as "I try to get others to do my duties." The takers were significantly more likely to invest the extra $1 million than the givers.
Reprinted with permission from Hachette India
GIVE AND TAKE: A REVOLUTIONARY APPROACH TO SUCCESS
AUTHOR: Adam Grant
PUBLISHER: Weidenfeld and Nicolson
Price: Rs 499
The influencer
- Grant, 31, is the youngest-tenured and highest-rated professor at Wharton. He is also one of the most prolific academicians in his field, organisational psychology, the study of workplace dynamics
- He earned PhD in organisational psychology from the University of Michigan and his BA from Harvard University, magna cum laude with highest honors and Phi Beta Kappa honors
- His influence extends beyond academia. He regularly advises companies about how to get the most out of their employees and how to help employees get the most out of their jobs. He has presented for leaders at organisations such as Google, the NFL, Merck, Pixar, Goldman Sachs, Facebook and Microsoft.
- A leading expert in work and success, he has more than 60 publications in management and psychology journals
- In 2011, he won the triple crown of prestigious scholarly achievement awards from the American Psychological Association, the Academy of Management, and the Society for Industrial and Organisational Psychology
