Trump on Afghanistan and the Garden Bridge – Two Examples of the Same Fallacy

Two seemingly unconnected events of the past couple of weeks actually both emphasised one of the most basic, fundamental and yet often ignored principles of business - and indeed of life.

This was President Trump speaking about the war in Afghanistan, one of the better speeches he has made of his term in office.

“First, our nation must seek an honorable and enduring outcome worthy of the tremendous sacrifices that have been made, especially the sacrifices of lives. The men and women who serve our nation in combat deserve a plan for victory. They deserve the tools they need and the trust they have earned to fight and to win”.

So he is relating current decision making and the future strategy to the past “investment” – in monetary terms but even more so in the tragedy of lost lives.

But these past events and terrible payments made by the American people are what we call “sunk costs”, both financial and human. And the basic principle that everyone should understand and act upon is that sunk costs should have no bearing on decisions about the future.

We saw a parallel with reporting around the London Garden Bridge, where editorials in the Evening Standard and (very disappointingly) the Times saw the oligarchs and George Osborne sticking together to praise the scheme, despite the opposition and the very dodgy procurement we keep mentioning here. This was from the Standard:

Some £37.4 million of public investment has been spent on pre-construction work: this money is not coming back. Wouldn’t it have been better to carry on and build it?

The writer, Lord Davies,  was a Labour peer and Minister and was Chairman of Standard Chartered Bank. Yet he doesn’t appear to understand the sunk cost fallacy – “we’ve spent the money so we might as well carry on”, as he pretty much says. If that’s how bankers think, it’s not surprising we have experienced  the disastrous issues we have in the last decade with that sector.

At least Trump is talking about honouring the human investment, and we can see the moral power of that. But it is still the same fallacy unfortunately. To take an extreme example, should Japan have fought on into absolute destruction in WW2 to honour the “sacrifices” made by their people?

When we make decisions, we have to start from where we are today, and look at the best options going forward, not looking back. The same applies in many areas within the procurement space too, whether it is investment is systems - “we’ve spent all this money on an ERP system, we must persevere even if it is clumsy, expensive and inefficient”. Or the same with suppliers - “we spent a lot of money developing this supplier, we shouldn’t just kick them out because we’ve found someone better”.

We’re not saying by the way that we think Trump’s strategy for Afghanistan is wrong – we don’t understand enough to comment. But make the decision for the right reasons. Learn from the past, of course, but make your decisions based on the future projected flow of costs and benefits, applying probability where appropriate. And ignore what you have spent in the past.

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First Voice

  1. Andy Spriggs:

    This applies equally in the broader project management space. At each “gate”, stakeholders are deciding whether to spend more to achieve benefits. Hence the “Do Nothing” case (what benefits do we derive from going with the solution we have developed so far?) should be netted off against the future benefits that will be achieved by investing the remaining amount. It can create counter-intuitive justifications for either stopping or proceeding. It is this conundrum that has led many towards so-called Agile developments, where benefits feed in as the development proceeds.

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