Learning from Failure in Risk Management
In the world of risk management, one of the most significant pitfalls is the Concorde Fallacy - a cognitive bias that can lead individuals and organisations down a dangerous path.
The Concorde Fallacy refers to the tendency to persist with a failing course of action simply because considerable resources have already been invested in it. As the sunk costs mount, decision-makers become emotionally attached to their choices, blinding them to better alternatives and increasing the potential for catastrophic losses.
In recent weeks, we have seen highly contentious announcements by Governments in Victoria and New South Wales where cost blowouts have questioned the viability and ability to proceed. In the first of these the Andrews Government in Victoria announced its withdrawal from the 2026 Commonwealth Games, citing cost blowout to between AU$6b to AU$7b. The Minns Government in New South Wales announced a review of the Metro West line due to an expected blow out of AU$17b.
The arguments for the benefits of these projects are plentiful, although for the Commonwealth Games such arguments seem to be futile, as Andrews seems resolute on his decision. The Minns review of the Metro West project remains undecided.
As these projects are reviewed it is important the decisions to proceed, or not, are not based upon what has been spent to date. There is no question that we all abhor waste, and money spent on a development that is terminated does seem to be a classic example of such waste. But the benefit in completion must be justified by the total spend, not just what has been spent to date. “We have come too far to stop now”, is not a reason to keep spending money if the cost is not justified by the benefits.
This is the essence of the Concorde Fallacy, and addressing it is crucial for effective risk management. Thankfully, not many organisations face the challenges faced by the Victorian and New South Wales Governments in these 2 projects, but none the less, the Concorde Fallacy is alive and well in our corporate environment. Here are some strategies for Risk managers to navigate this cognitive trap:
1. Early Detection and Flexibility: Risk managers must establish robust systems to detect failing projects or investments early on. Implementing regular reviews and performance assessments will allow them to spot warning signs and adapt their strategies promptly. Being flexible and open to change ensures that decisions are based on future potential rather than past investments.
2. Embrace Failure as a Learning Opportunity: Encourage a corporate culture that views failure as a stepping-stone to success. When risk managers foster an environment where failures are analysed objectively and transparently, employees are more likely to abandon failing ventures without hesitation and seek more promising alternatives.
3. Independent Assessment: Engage external experts or independent teams to evaluate projects and investments. These impartial assessments can offer valuable insights that might be overlooked by those who are emotionally invested in the endeavour.
4. Define Clear Exit Criteria: Establish predetermined exit criteria before embarking on any venture. These criteria should be based on quantifiable data and specific performance indicators. If a project consistently falls short of these metrics, it should trigger an exit strategy without delay.
5. Encourage Devil's Advocacy: Risk managers should encourage team members to challenge decisions and actively play the role of devil's advocate. This practice fosters critical thinking and helps prevent emotional attachments from clouding judgment.
6. Scenario Planning: Develop multiple scenarios for potential outcomes, including worst-case scenarios. This exercise prepares risk managers to make informed decisions when facing adversity and minimises the likelihood of succumbing to sunk cost bias.
7. Monitor Opportunity Costs: Remind decision-makers of the opportunity costs involved in persisting with a failing endeavour. Resources tied to a dead-end project could be better allocated elsewhere, where they have the potential for more significant returns.
Recognising and addressing the Concorde Fallacy is essential for Risk managers to make sound decisions and safeguard their organisations from undue losses. By adopting a flexible and learning-oriented approach, Risk managers can navigate the complexities of uncertainty, identify failing ventures early, and redirect resources towards more promising opportunities. Ultimately, embracing the lessons of failure will pave the way for a more resilient and successful risk management strategy.
We will have to wait to see whether the Concorde Fallacy plays a role in the way forward for the Minns government with the Metro West project.