Sunk cost and commitment escalation

[Martin Nore]

Dear Sirs,


I am writing my masters thesis on persistent problems in organisations,
and would as part of this model the ""sunk cost fallacy"" in a project
considering several decision points. As an example I will use the product
development process to examine the dynamics of escalation of commitment
and its impact on which ideas are forwarded in the development process
and which ones are rejected.

Hopefully this will lead to insights on whether there are any high-
leverage strategies that can be employed (systems for determining
the potential of a project, incentive systems and so on).

I have searched for literature on the topic, but has not been able
to find a dynamic model (neither stock & flow nor causal loop) on
the topic, but have been able to find extensive literature on the
psychology leading to escalation of commitment and on innovation
pipelines.

My questions are therefore where I should look for a model which
is already dealing with such a problem, and whether there are
existing models that already capture important parts of the dynamics
of either the sunk cost fallacy or the product innovation pipeline,
so that I could use one as a starting point for further development.


Best regards,

Martin Nore
From: ""Martin Nore "" <martin.nore@operamail.com>

[Bill Harris]

Martin,

I did an At Any Rate(tm) column for Pegasus on how Hewlett-Packard
Company made product development decisions for many years. If I
understand your premise correctly, their process is an example of one
that ignores sunk costs. See ""You Need More Than Brilliant Ideas"" at
http://www.pegasuscom.com/AAR/model.html.

Does that help?

Bill
From: Bill Harris <bill_harris@facilitatedsystems.com>
--
Bill Harris 3217 102nd Place SE
Facilitated Systems Everett, WA 98208 USA
http://facilitatedsystems.com/ phone: +1 425 337-5541

[Marcel Vallée]

Martin,

As I should not attach files to messages to SD, I am sending this
email to you with *.pdf files, and a copy without to SD. Those
who are interested can send me a request for these files.

Here is a summary of my life experience as a mining geologist and
engineer regarding common causes of problems in a number of new
mining projects, as well as in established ones, in one sentence:

""Lack of system thinking, lack of quality management, incomplete
information, incomplete and/or faulty design/costing, last but
not least, a production decision, based on an incomplete
feasibility study (partial design, more or less relevant
costing). Not all projects are like that, of course.

It is almost a world-wide custom to try and get a board's
approval with an optimistic and incomplete feasibility study. The
principle, as I heard it worded by a well established consultant
when I was a young geological engineer was: ""The most important
thing is to get the client's hand caught in the clothes wringer
as early as possible.""

I am sending you two papers as pdf files that were published in
the CIM Bulletin (Canadian Instutute of Mining, Metallurgy and
Petroleum)

1) ""Mineral Resource + Engineering, Economic and Legal
Feasibility = Ore Reserve"" CIM Bulletin,"" March 2000, by M. Vallée.

This text contains summaries of several earlier studies, among
which one was sponsored by the World Bank to analyse causes of
cost overruns and start up problems in international projects by
major mining companies, another one by a former vice-president of
Chemical Bank in New York.

2) ""System Thinking for Quality Management and Continuous
Improvements in Mining."" CIM Bulletin, Feb. 2000, by M. Vallée.

This text looks at the internal problems caused by parts by a
lack of system thinking, in part by the shortcomings listed above
and proposes an adaptation of the W.E. Deming and Jamshid
Gharajedaghi perspectives to the mining sector. It quotes two
more recent studies on problems encountered by new mining projects.

Similar problems have come out of several papers and a book by
Professor Bent Flyvbjerg in Denmark and his collaborators
<flyvbjerg@i4.auc.dk>.

Here is the full reference of one of them::

Bent Flyvbjerg, Mette K. Skamris Holm, and Søren L. Buhl,
""Underestimating Costs in Public Works Projects: Error or Lie?""
Journal of the American Planning Association, vol. 68, no. 3,
Summer 2002, pp. 279-295.

The article may be downloaded in the following three places:

http://www.planning.org/japa/publicworks.htm
http://www.planning.org/japa/pdf/JAPAFlyvbjerg.pdf
http://c1.planning.org/japa/pdf/JAPAFlyvbjerg.pdf

Professor Flyvbjerg is also the author of a recent book titled
""The Anatomy of Ambition,"" Cambridge University Press, that also
deals with these problems.

I am not implying that the perspectives outlined here are the
final asnwer, just that if the basics are inadequate and
neglected, an implementation of System Dynamics will be starting
the race hobbled and some of the lessons obtained may well be of
dubious utility.

The Best in your project


Marcel

--
Marcel Vallée Eng., Geo.
Géoconseil Marcel Vallée Inc.
706 Routhier St
Québec, Québec,
Canada G1X 3J9
Tel: (1) 418, 652, 3497
Email: vallee.marcel@sympatico.ca