Freek Vermeulen

Niro Sivanathan

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">In Brief</h4>
 <div class="ideainbrief-contents">
  <h5>The Problem</h5>
  <p>Companies often stick too long to a once successful but failing strategy. The British music company HMV did so, and it went from commanding a 40% share of Britain’s music market to receivership in just over a decade.</p>
  <h5>Why It Happens</h5>
  <p>Research has identified many biases that explain why decision makers may escalate a prior commitment, including the sunk cost fallacy, loss aversion, the illusion of control, preference for completion, pluralistic ignorance, and personal identification.</p>
  <h5>The Solution</h5>
  <p>Companies can reduce their exposure to escalation by adopting six practices: Set decision rules; pay attention to voting rules; protect dissenters; expressly consider alternatives; separate advocacy and decision making; and reinforce the anticipation of regret.</p>
 </div>
</article-ideainbrief><p>By the end of the 1990s the British music company HMV was on top of the world. Its business model—operating Main Street stores in which customers could browse through a wide collection and listen to tracks with an in-store headset before they decided whether to buy a CD—had delivered the company an enviable 40% market share in Britain.</p>

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<p>People have a tendency to stick to an existing course of action, no matter how irrational. In the management literature, this is known as an <em>escalation of commitment,</em> and in nearly every academic case study on the demise of a former industry leader, it played a major role. The story of the British music company HMV&#8212;whose managing director dismissed downloadable music as &#8220;just a fad&#8221;&#8212;is a classic example.</p>
<p>Escalation of commitment is explained by a number of mutually reinforcing biases, among them: the sunk cost fallacy, loss aversion, the illusion of control, the preference for completion, pluralistic ignorance, and personal identification. The authors describe six practices that can help counteract these biases: (1) Set decision rules. (2) Pay attention to voting rules. (3) Protect dissenters. (4) Expressly consider alternatives. (5) Separate advocacy and decision making. (6) Reinforce the anticipation of regret. Overcommitted executives, they write, are prone to ignore signs of their company&#8217;s imminent collapse. These practices will encourage managers at all levels to make decisions more objectively.</p>

Stop Doubling Down on Your Failing Strategy

People have a tendency to stick to an existing course of action, no matter how irrational. In the management literature, this is known as an escalation of commitment, and in nearly every academic case study on the demise of a former industry leader, it played a major role. The story of the British music company HMV—whose managing director dismissed downloadable music as “just a fad”—is a classic example. Escalation of commitment is explained by a number of mutually reinforcing biases, among them: the sunk cost fallacy, loss aversion, the illusion of control, the preference for completion, pluralistic ignorance, and personal identification. The authors describe six practices that can help counteract these biases: (1) Set decision rules. (2) Pay attention to voting rules. (3) Protect dissenters. (4) Expressly consider alternatives. (5) Separate advocacy and decision making. (6) Reinforce the anticipation of regret. Overcommitted executives, they write, are prone to ignore signs of their company’s imminent collapse. These practices will encourage managers at all levels to make decisions more objectively.

Stop Doubling Down on Your Failing Strategy

Summary.

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