In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs (also known as retrospective costs) are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken.
In a fascinating article about “Sunk-cost” – published in The New Yorker – Hal Arkes, a psychologist at Ohio State University explains: “Giving up on a project, though, means that somebody has to admit that he shouldn’t have done it in the first place. And there are lots of executives who would rather be tortured than admit that they’re wrong.”
If you’re faced with this problem, it’s tempting to look to those times when staying the course has worked out although research has shown that changing executives is the right way forward, out of trouble and into the future. ”Taking the original decision-maker out of the picture and letting a fresh pair of eyes look at the pros and cons can help,” Arkes says. He points to a Staw study of a bank that found that loan officers were reluctant to acknowledge that loans they’d made had gone bad, whereas new executives were far more likely to take the loss and move on.
Word on the street is that Arsène Wenger has already signed his two-year contract extension and the club are looking for a good time to announce it. The rumors suggest also that Arsenal prepare to invest £100 million in strengthening his squad (It’s PR bullshit, that’s what it is).
Anyhow, Wenger is the sort of executive who would rather be tortured than admit that he’s wrong, who is not giving up on a project that is torturing him and Arsenal fans. He now can spend more, but it will deepen problem. That’s because, as Arkes and others have documented, a greater investment in a project increases people’s belief that it will succeed but won’t solve its original problems. It is a case of what psychologists call the “escalation of commitment.” Meaning, it’s the continuation of wrong investments. Just with more money.
Arsenal are on a dangerous road. The club is in dire need to change but Wenger is not the man to lead that change.
Oh, Wenger has earned nearly £100 million from Arsenal and its most expensive season tickets in the world of sports since he last won the title.
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