When General Motors launched Saturn, in 1985, the small car was GM’s response to surging demand for Japanese brands. However, after a brief sales peak in 1994, sales drifted steadily downward. While GM did go on to make a few changes to the division, it still went on to invest $3 billion to in 2004 to rejuvenate the brand despite continuous losses. Why?
This is a classic study in escalation of commitment – when we sink more resources into a prior decision despite new information telling us otherwise. How do we avoid this?
Well-run private equity firms may have an answer for us. One leading US firm assigns independent partners to conduct periodic reviews of businesses in its portfolio. If Mr. Jones buys and initially oversees a company, Ms. Smith is charged with reviewing it and is made accountable for the unit’s final performance. Although the process can’t eliminate the possibility that the partners’ collective judgment will be biased, the reviews not only make biases less likely but also make it more likely that under-performing companies will be sold before they drain the firm’s equity.
Here’s to more independent audits of our own decisions – especially when we find ourselves doubling down on losing investments.
The key to success, it seems, lies not in never quitting, but in knowing when to quit. That can be a tall order for people who like a concrete set of rules to follow, including “Never quit.” The data on quitting may just be further evidence of that so hard to swallow truth, that the only hard and fast rule of adulthood is to make your own rules, and even then be open to changing them. – Jessica Rotondi on the sunk cost fallacy, Huffington Post
Source and thanks to: The McKinsey Quarterly