Intelligent Leadership

The world is changing and that changes everything. Each fortnight, I will make an assertion that reflects this change. The goal being to stimulate discussion and to jointly get to the truth in respect of how we navigate an increasingly unknowable world.

Try this for size:

The sunk cost fallacy is a fallacy

Viva Las Vegas

The sunk cost fallacy is a phenomenon that leads people to continue investing in an initiative when all the signs indicate that the initiative is failing - a reluctance to accept that the investment to date is unlikely to deliver a return. An extreme example of this is the gambler who opts to overcome a series of losses by increasing subsequent bets.

In fairness to the gambler, if the bet is of a linear / recurrent nature, eg. a slot machine, this approach may well work, particularly if the jackpot is high enough and the gambler has sufficient reserves.

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Project plans – a new genre of fiction

In a simple / mechanical environment, the link between effort and outcome is clear. There are very clear steps to building a bridge. Good project management will ensure that the costs incurred align with progress made. But even such mechanical projects are subject to external pressures, for example:

• Geopolitical tensions give rise to supply chain issues.
• A critical subcontractor exploits their position to renegotiate their fees.
• A pandemic halts progress at a critical stage, resulting in a collapse of the partially completed construction.
• A state actor has gained access to the toll management technology and is now well positioned to cause disruption.

So, even simple linear projects are subject to complex forces. Such forces rarely declare themselves in the planning stage, sometimes choosing to make an appearance when the end is in sight. With macroenvironmental disruption on the increase, such risks are likely to occur more frequently and be increasingly unforeseeable.

Trails and tribulations

As disruptive forces compound and conflate, the number of initiatives focused on addressing novel situations will increase. By definition, there will be no playbooks to call upon. So process risk can be added to the risk management register. Such initiatives can be deemed as complex. And so traditional approaches to risk / project management no longer apply.

To put this into context, linear initiatives are like entering a fun run. The distance is declared, as is the route. If you pull a muscle / break your ankle, you can decide whether a heroic crawl finish is a good look (at say a village fete), or whether pulling out makes more sense.

Complex initiatives are like entering an ultra-marathon, where both the distance and the finish are undeclared. After 30 minutes running, you are told you are heading in the wrong direction. After three hours, the trail stops, or you find yourself at the foot of a cliff. After eight hours, your feet start to blister. After 14 hours, you cannot keep food down. You are falling apart, but you press on. You are no stranger to heroic crawl finishes; it is just pain.

Your support team patch you up at unofficial staging posts, where you occasionally take the opportunity to nap. Soon you are ‘back on solids’ and walking / running at your ‘forever pace’, which is subject to appropriate ongoing hydration and nutrition. On day four, you are informed where the finish is. You are twenty miles away, but this news seems to have had a regenerative impact and now you are ‘kicking’ for home.

What next!?

Life is an exercise in prediction and risk management. As the world becomes more unknowable, your focus will move from winning a fun run to simply staying in play long enough to reach the goal. The game our ancestors played involved staying alive long enough to reproduce and rear their offspring. As a leader, your role is to create an organisation that can remain economically relevant and valuable in increasingly turbulent markets.

There will increasingly be times where the investment to date does not appear to be commensurate with progress made. Governance needs a reset.

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The eighth wonder of the world

Such is the nature of exponential phenomena that there is little evidence of progress throughout the duration of the development lifecycle, even though there are imperceivable gains. These gains eventually become visible and then almost immediately the ‘journey’ is complete. Think:

• Invention of the lightbulb.
• Collapse of society.
• Planning to ‘insta’ a forecasted tsunami from a beach bar.

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Unsunk heroes

Complex environments make the ‘unsunk costs fallacy’ a more relevant phenomenon. In other words, in a complex world it is not a requirement that great results require great effort. ‘One hit wonder’ singers and founders come to mind.

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Out of sight, front of mind

In conclusion, the sunk costs fallacy is not useful wisdom in a world where progress is often invisible until you see the home straight. This requires a different approach to risk management, project management and organisational resilience.

FYI. I started this post 24 years ago.

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