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Enhancing Organizational Performance

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Did you ever notice how perfectly the morning sunlight streams through the kitchen window? Or how the positioning of the house allows for gorgeous winter water views? Or how the crackling fireplace creates such a perfect atmosphere in the family room? An owner who has spent years living in a house typically knows each and every one of its strengths and views them as something special or exceptional. They put added value on the house due to those characteristics. (They also know the house’s short-comings but often overlook them).  Each person sees this added value in their own house. After all, if it weren’t special or exceptional, what would it say about me for living there? (Cognitive dissonance). As I continue to invest my time and resources in improving my house, from my perspective, my beliefs and values about my house simply become stronger (Sunk Costs). And with limited house owning experience some assume that it just couldn’t get much better than their own house (WYSIATI – what you see or experience is all there is). If and when they go to sell the house they put that perceived exceptionalism into the price tag and then wonder why the house does not sell. They wonder why others don’t perceive the exceptionalism that they do, why others don’t value the things they themselves value (see Organizational Rainbows Cast no Shadows). They are baffled and when they have to lower their price (the value they perceive in the house), they can get angry. Real estate agents serve a useful purpose as a buffer between a buyer who does not perceive the same exceptionalism and the seller who wants to say, “Why don’t you understand”?

The house example above is both real and metaphor. These principles cause people to see exceptionalism in many of their activities, beliefs and convictions. They do not simply apply to what you own, but also to actions you take, where you work, the religion you belong to, the college or university you attended, the person you married, the country you live in and political system by which you are governed.  But before I am accused of painting with too broad of a brush, it is quite clear that there are plenty of times where people can break out of this pattern, discard or change their own values and see the value, or be convinced of the value that others are seeing in an object, belief system, governance structure, investment etc. Just look at how attractive gold is to most people. Gold in and of itself has limited value, you can’t eat it, drink it, breath it. It does not impart health or wisdom to those who hold it or wear it. Its value comes from the combination of its rarity and desirability, a desirability that shows up as a commonly held value. The same could be said of other objects of limited day-to-day usefulness, but that generally are seen as being of high value – artwork, antique cars and other rare objects are often tagged with the phrase exceptional, and we are attracted to things that are rare as it makes us feel special to be in possession of them.

Describing how humans fall under the spell of exceptionalism as a construct is not meant to imply that there is no right or wrong, moral or amoral, good or evil, that there are only points of view. The notion that there are only points of view is a cop out for there certainly are social structures and social norms, governance systems and other conventions that humans apply to other humans that are abhorrent. Systems that keep some in poverty with a lack of opportunity, that subjugate or do not create equality are systems that need to change. Understanding the psychology that makes it more difficult to change them can help enable the needed change.


Written by Jeffrey M. Saltzman

January 16, 2016 at 8:45 am

Sunk Costs

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The patient in the ICU had given instructions for no heroic life support. Heroic is of course subjective as one person’s routine might be deemed heroic by another. Never-the-less over a period of almost two weeks the measures taken would be described by most any observer as heroic. How did it happen?

It started as simply some abdominal pain. A trip to the ER revealed a small perforation in the intestine, a complication of diverticulitis. The patient was admitted, put on intravenous antibiotics and a small amount of supplemental oxygen. At first the antibiotics seemed to be working, but then the patient took a turn for the worse. An abdominal abscess was discovered, the dosage of the antibiotics being given was increased and a pathology report led to a change in the type of antibiotic being used. Again, positive signs emerged. Up to this point fairly routine healthcare.

After a day or two the patient once again took a turn for the worse with the infection having turned into sepsis, an infection of the blood itself. Sepsis led to edema, where the fluids that normally travel in the bloodstream leak through small blood vessels into surrounding tissue, including the lungs. The patient now required large amounts of replacement fluid via IV as without the fluid in the blood itself, blood pressure plummets. Pressers, a class of drug to raise blood pressure, were now begun to help counter the loss of fluid. Increasing the amount of fluid of course also increases the amount of fluid leakage. And the continual fluid build-up led to each breath becoming increasingly more difficult. Abdominal pressure also caused by the fluid buildup was increasing to critical levels and it was putting dangerous levels of pressure on the internal organs. The patient was obviously struggling. A decision to intubate the patient, to breathe for the patient had to be made, it was thought that a few days, at most, of being intubated would allow the body to fight off the infection. It was only one small additional step. The family gave the go ahead to intubate.

The infection continued to rage and it was now thought that the abscess that had been discovered needed to be physically drained in order to help the body heal. A procedure was scheduled as it was only another small additional step. The abscess was successfully drained, but the patient did not improve. All of this had now been going on long enough that nutrition had become an issue. A nutritional IV bag, a very small additional step was hung and added to the numerous other medicines and fluids the patient was receiving. A few more days went by. Small signs of improvement were noted. Diuretics were started at a low level to relieve some of the pressure on the internal organs. As soon as the diuretics kicked in the blood pressure once again plummeted. One option that was out on the table was major surgery to clean out the abdominal cavity from additional abscesses that had developed. The odds of the patient surviving the surgery were not good. It was clear now that things were on a continual downward trajectory. If you took a step back and looked at the patient surround by beeping and whirling machines, IV bags, and numerous sensors, it was clear that the desire for no heroic measures had not been met and the culprit was sunk costs.

Sunk costs is a common factor in human decision-making. It is when a series of incremental decisions or investments are made, each one by itself relatively small. Each one requiring an investment in capital, effort or other resources that is made more likely because of the investment in capital, effort or other resources that have already been made. If the patient described above had known of the eventual end state of all of these incremental steps the decision path may have been different. Unfortunately, even highly skilled physicians are not omniscient. We begin to head down a certain road with our decisions and as we head down that road it is increasingly difficult to say to ourselves “we are on the wrong road, it is time to get off”.  Sunk costs. The expenditure of resources makes it increasingly more likely that an additional expenditure of resources will be made to achieve a goal, even as that expenditure makes the goal less and less attractive or worthwhile.

It happens in all sorts of situations. You buy a cute little house, which you thought was reasonably priced. You find out that it has termites. You fix the problem, and then find out it needs a new roof. After the new roof, a new hot water heater is required, then in quick order you deal with refrigerators, stoves, leaky windows, poorly done wiring from a previous renovation, a broken furnace and an air conditioning system that is refusing to work. When you take a step back, you realize that your cute little house has turned into a money pit and if you had known up front what was going to happen you never would have bought it in the first place. Most of us are also affected by a sense of positivism or optimism regarding outcomes arising from our decisions, along with the difficultly of deciding when to get off the path.

In the New York Times (1/10/16) there is a story about how the economic slowdown in China is affecting commodity prices around the world. What path are the producers of these commodities taking as the value of the commodities in the market plummets? From the Times: Chile is expanding its largest open-pit copper mine….India is building railroad lines that crisscross the country to connect underused coal mines…. Australia is increasing natural gas production by 150 percent….Oil sands in Canada are just starting to produce….Iron ore mines in West Africa are coming online…Freeport-McMoRan is finishing up a $4.6 billion dollar expansion of a copper mine in Peru.” It is so big it will consume 10% of Peru’s electricity production when operational. Freeport-McMoRan’s board, taking a step back and seeing the big picture asked the CEO to step down.

So is there anything that can be done to better recognize that you have begun down a path of sunk cost decision-making? Can you improve your decision-making abilities? The answer to both of those is yes. Decision-making, like other skills, can be practiced and practice and training can result in improvement in your decision-making. The first step? Understanding how people fall into certain decision-making paradigms traps.


Written by Jeffrey M. Saltzman

January 10, 2016 at 12:14 pm

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