THINK AGAIN: CONCEPTS TO REVOLUTIONIZE PEOPLE DECISIONS
It is human nature to try to avoid
failure. While admirable in many
situations, in business, this trait can
prolong ineffective projects and
practices, or even make them worse.
Opportunity costs are extremely salient for the issue of hiring.
I am frequently frustrated by my colleagues wanting to hire
a moderately good psychologist who has become available.
I find it difficult to get them to realize that every hire involves
paying an opportunity cost. If the person in question is not
ideal for the job, and it’s possible that in the not-too-distant
future someone better qualified might come along, then it’s
a mistake to hire this person. The opportunity cost in such a
scenario is too high.
In business as in personal life, it sometimes pays to consider
alternatives that may not be evident—or indeed immediately
available. Forgoing the better option in the name of saving
time or money, can in fact be counterproductive.
4. Sunk Cost
Let’s imagine that a month ago you bought a ticket to a sporting
event in a nearby city for US$100. Tonight’s the night, but the
star is not playing, nothing hangs on the outcome of the game,
and the weather has turned bad enough that getting there
is going to be unpleasant. Do you go to the game? For most
people, the answer would be yes—after all, not going would be
wasteful. An economist, however, would say, “Nope. You can’t
waste money you don’t have.” The hundred dollars are already
gone – it’s a sunk cost. You can’t get the money back by going
to the game, and you would end up paying twice: once for the
ticket and once for the tedium.
But even with an economist at one elbow, you’re probably going
to need a psychologist at the other. Paying money for nothing
produces what psychologists call cognitive dissonance. You’re
going to be motivated to find reasons for going to that game so
that you don’t have to suffer the feeling of loss.
You might tell yourself that you’ve often gone to games not
expecting much and they’ve turned out to be interesting.
The psychologist, meanwhile, may say, “Suppose you hadn’t
bought a ticket to the game, and a friend calls you up to say
he’s got tickets he can’t use, and asks if you would you like to
have them.” If your answer would be, “Great, I’ll be right over,”
then by all means go to the game. But if your answer would
be, “You’ve got to be kidding. The star is not playing, nothing
hangs on the outcome of the game, and it’s nasty out,” then
break out a novel and pour yourself a drink.
74 Emerging Markets Business Summer 2016 • Issue No. 1
Here’s a different scenario. A pharmaceutical company is charging
an astronomical cost for a drug. Complaints are met with the
assertion that the company has to recoup the costs of development.
They’re pulling your leg. They’re going to charge whatever the
market will bear. They know perfectly well that the development
cost is sunk—whether it was a thousand dollars or a billion dollars.
If you’re the CEO of a company with a project that’s beginning to look
dubious, consider replacing the manager. The original manager is
too likely to want to justify the cost he or she has already plowed
into the project. It is human nature to try to avoid failure. While
admirable in many situations, in business, this trait can prolong
ineffective projects and practices, or even make them worse. In
this case, the existing manager is likely to continue wasting time,
effort and resources on something which is all but destined to fail,
rather than cutting his or her losses and moving forward. If hired,
a new manager is more likely to properly regard past expenditures
as sunk costs, and put company resources to better use.
5. The Self-selection Problem
The New York Times recently published an article reporting on
the safety of a very large number of autos. The ratio of deaths
to millions of drivers was enormously higher for the Ford F 150
pickup than for the Volvo station wagon. So the Volvo wagon
is hugely safer than the Ford pickup, right? But those data
don’t actually speak to the question of which auto is safer. Ask
yourself who is more likely to drive the pickup: a 25-year-old
cowboy or a 40-year-old homemaker? And who is more likely
to drive the Volvo wagon? The type of auto driven is confounded
with the type of driver. To put that another way, there is a selfselection problem. We don’t assign people at random to autos.
They select the autos themselves.
A fair amount of the scientific findings we read about in the
popular press are fatally flawed because of the confounded
variable or self-selection problem.
Let’s consider another self-selection case. Does diversity
training improve rates of hiring women and minorities? One
study examined this question by quizzing human resource
managers at 700 U.S. organizations about whether they
had diversity training programs and by checking on the
firm’s minority hiring rates filed with the Equal Employment
Opportunity Commission (Kalev, Dobbin, & Kelley, 2006). As it