No matter how carefully managers plan, there is always the chance of failure. Moreover, managers often make matters worse by persisting with failing ventures and end up throwing good money after bad – a phenomenon known as escalation. But there are simple ways to avoid it.
Almost all decisions involving uncertainty have some unintended consequences. Sometimes, however, the results are the very opposite of what was hoped for.
When it becomes obvious that a venture is failing managers may be faced with a choice between cutting their losses or persisting, in the hope of eventually succeeding though at the risk of making matters worse. History is rich in examples of managers choosing to carry on to the bitter end. For example, US film studio United Artists continued making Heaven’s Gate even though it knew that the venture might put the studio out of business – as indeed it did. Barings continued posting millions of pounds in collateral to support Nick Leeson’s trading even though the financial markets in the Far East were ablaze with rumours suggesting that Barings was close to collapse.
Why do experienced and sophisticated managers behave in such an apparently irrational way? The issue Take off optional, landing compulsory: risk and escalation in decision making Helga Drummond is important because although market forces eventually curb non-viable ventures they are frequently slow to act. By the time such forces play themselves out the damage is usually well and truly done. Meanwhile organisations may incur needless losses that are ultimately passed on to society in higher prices, diminished pension funds and other losses.
Part of the problem is that we know a lot more about how to galvanise organisations into action than we do about how to stop them if they start to move in the wrong direction. That said, research by social scientists offers some clues.
For example, the most dangerous time in a new venture is usually at an early stage. These are dangerous because enthusiasm and confidence tend to be high. It is a time when almost anything appears possible and when ventures can appear more important than they really are. It is also a time when decisions are taken that subsequently return to haunt the takers. United Artists, for example, was ecstatic when it succeeded in contracting the hugely successful Michael Cimino to produce Heaven’s Gate.
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