The Sunk Cost Bias

Here is an interesting article about how to analyze projects to determine the right time to kill them off.

For most managers, it's easier to assign resources than to terminate a project, and the result is that unsuccessful projects often live longer than they should. How does this impact business, and can the capability to manage this process more effectively give a firm a measurable competitive advantage?

Competitive advantage? I never thought about it that way, but I guess it could apply. Learning when to kill projects at the right time is difficult because of the sunk cost bias. It's hard to terminate something that we have put a lot of money and effort into, even if it won't payoff. But consider this:

According to Coff, the tension between assigning resources and terminating capabilities is something managers must come to grips with. "What's more important," Coff asked in response to Guler's presentation, "the ability to pick the winners or the ability to terminate the [non-winners]?" Guler's numbers suggest that a firm's ability to better manage the "non home runs" gives them a clear advantage.

On the flip side, VC firms that had a specific industry focus tended to do better than those firms that did not. Guler's numbers also indicated that companies that received fewer rounds of VC funding did better over time.

Back in business school I don't remember talking about this much, except briefly in an accounting class, which is a shame. It is one of those things managers at all levels should spend more time learning about so they can understand how it affects their bottom line.