Jeffrey Saltzman's Blog

Enhancing Organizational Performance

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

One Response

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  1. […] my house, from my perspective, my beliefs and values about my house imply become stronger (Sunk Costs). And with limited house owning experience some assume that it just couldn’t get much better than […]

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