27 Nov The greater the investment of time, effort or money in an endeavor the harder it is to abandon it (PAWEL MOTYL)
The sunk costs effect rests on the irrational continuation of an action that has no chance of success, but in which we have invested significant finances, time, or effort. A person caught in this trap thinks that, because they have already incurred serious costs, they can’t withdraw, as this would essentially
confirm their losses to them. We’ve all encountered numerous examples of this behavior. Someone who’s invested money in a bad business is prepared to continue investing, keeping their illusory hopes of success alive. A gambler in a casino who’s lost all his money will think nothing of pawning his watch in
hopes of recouping his losses. A car that keeps breaking down despitecountless repairs (and that you should really sell as quickly as you can) continues to be a drain on your finances, much to your mechanic’s delight. We find it hard to make a decision that is tantamount to admitting we were wrong,
and we therefore continue to throw good money after bad.
A particularly dangerous form of sunk costs is the image trap, as our reputation is also a kind of investment. The more we’ve backed a venture, the more we feel emotionally tied to it. The more emotionally engaged we are, the harder it is to remain neutral about it. One of my friends from the high-tech sector observed many years ago that there’s nothing more difficult than dropping a
project you’ve put your name to.
It’s no accident, then, that the sunk costs effect acquired its colloquial name from the Concorde story. This groundbreaking project became increasingly difficult to justify in economic terms, and at a certain point it really should have been shelved, set aside until better times or technological advances made
it possible to reduce its operating costs and noise levels, and so on.
Unfortunately, the costs already incurred, together with the earlier enthusiastic declarations of support from not only the airlines but also the governments of France and the UK, left the decision-makers in a sunk costs trap, which they couldn’t get out of. Irrational economic decisions were taken to continue the
work and introduce the aircraft into the fleets of both carriers.
Other examples abound in the world around us.
Surprisingly, even the Germans, consistently held up as models of solidity and scrupulous business sense, are struggling with a project whose financial dimension bears an uncanny resemblance to a bottomless pit. Berlin used to be served by three airports, Schönefeld, Tegel, and Tempelhof. With the reunification of Germany came the idea of building a large airport to accommodate a significant portion of the passengers from the existing ones and serve not only the German capital, but the whole of Brandenburg. After much squabbling, construction of the new Berlin Brandenburg Airport, slated to
serve close to 30 million passengers annually, began in 2006. Costs were estimated at over €2 billion, and the airfield was to open to passengers and airlines in 2010. The deadline wasn’t met—even though Tempelhof ceased operations in 2008 in anticipation of the planned opening of the new airport. Very
soon, it appeared that nobody could realistically set a completion date for the project. By 2010, the sole achievement of the project team was to have chosen a patron for the airport (Willy Brandt, who beat out Albert Einstein, Marlene Dietrich, and Claus von Stauffenberg, among others). It was finally announced
that the airport would open on June 3, 2012.
In May 2012, this was amended to March 17, 2013. When September 2012 came around, a new opening date was given: October 27, 2013. As I’m sure you’ve guessed by now, that date also
turned out to be unrealistic, so, at the beginning of 2013, the authorities announced that the Berlin Brandenburg Airport would open in 2014. This, however, was still a highly optimistic prognosis, because at the beginning of 2014 we were informed that an accurate prediction for the opening date of the air-
port was simply not possible, especially as a fundamental problem had arisen:
the only airline that was considering using Berlin Brandenburg as its main hub was the financially unstable Air Berlin (which ultimately went bust at the end of 2017, even further complicating the situation). It’s worth adding that, to date,close to €7 billion have been sunk into the project—and that’s certain not to be the final figure. Klaus Wowereit, the mayor of Berlin and head of the team
supervising the Berlin Brandenburg Airport project, resigned from his role as team lead in recognition of his involvement in the ongoing debacle. Despite this “heroic” gesture, nobody can say whether the new airport will ever be ready, and if so, at what cost.
THE ART OF DECISION MAKING
PAWEL MOTYL
