I recently read an article on behavioral research about the sunk cost fallacy (The Economist, 6-2-18)and it got me thinking about how much of this goes on in philanthropy. As many economists and writers have described, the sunk cost fallacy is irrational decision-making driven by emotion and based on past investments – and which disregards actual data and experience. Put more succinctly, it’s the proverbial practice of throwing good money after bad.
I’m not talking here about the hard work of tackling significant problems that take years of focus and commitment to have an impact on. I am talking about foundations and nonprofits that continue to invest time and money in programs and initiatives that aren’t going anywhere soon… but maybe if we give it one more year of funding or another redesign or hire different staff, then we’ll see some change. Or more likely, maybe not.
As I’ve written before, knowing the difference between when to stay the course and when to pull the plug – and having the gumption to do so – is called leadership.
Here are five red-flags that suggest the sunk cost fallacy may be driving your decision-making to put more time and money into a project or organization when it’s actually better to move on:
- You see lots of “activity” going on and very little real action
- There’s no evidence of substantial change, and there’s an inability and/or hesitance to set measurable objectives or targets
- Senior leadership stops showing up for meetings or they start sending their lieutenants
- Meetings result in agreements to have more meetings and not much else
- It’s a favorite endeavor of one or more board members and easier to keep funding it or working on it rather than calling the question.
If you see these red-flags popping up in your work, hit the pause button to re-consider if and how you continue your efforts.
For more information on how we help foundations and nonprofits strengthen their impact through strategic planning, evaluation and organizational development, contact Jeff Glebocki email@example.com or 480.794.0871.