Good decisions. Bad decisions.

I am busy preparing for my management course mid-term today. An article really grabbed my attention (after a very long time I must say); It talks about how organizations must manage product failures well to avoid resource drain. "Pulling the Plug" - it says is crucial to stop the financial resources going into a new product once there is enough data indicating a low probability of success or weak market reaction.

The issue the authors say is centered around the decision making psychology of the manager leading the new product development project. Two interesting concepts among others from the article are here -

... Issue of prolonged commitment to a losing course of action; That is, good money chasing bad. The fallacy of sunk costs refers to the tendency of managers to consider nonrelevent prior costs when making future decisions. For example, a person may frame his or her current decision relative to prior loss (like we observe in gambling). If so, and if the prospect theory is in effect, then the person will gamble more to make up for the losses relative to how he or she would behave if the decision were framed from a neutral starting point. ...

... There is a dilemma facing organization. Outcomes are important for firm performance; however, outcomes are fallible measures of decision making quality because they are also affected by actions outside the control of the manager and the firm. Consequently, if organizations focus solely on decision outcomes in evaluating the quality of their managers' decisions, they may induce their managers to prolong commitment to a losing course of action. ...


Source: Pulling the plug to stop the new product drain; William Boulding, Ruskin Morgan and Richard Staelin