Escalating commitment

A friend sent me this article about the Hulme supercar which, like many supercar projects, has run out of investment prior to launch.

There’s a lot to be said about the pitfalls of designing and manufacturing supercars:

  • it’s not unlike a cliff business that Seth strongly suggests most of us avoid,
  • it requires an impossibly broad range of skills,
  • most cars are vanity, ego-driven projects rather than customer-focused designs,
  • road safety compliance is almost impossible to obtain,
  • low volume production inefficiencies result in a world of pain, and
  • the start-up investment required is orders of magnitude higher than most estimate.

Very few low-volume car businesses survive. Even the names you know have struggled – Aston Martin commenced business in 1913 but apparently made its first profit under Ford ownership in the 1990s. That’s some cliff.

The cautionary tale I want to tell today, however, is of escalating commitment.

In her extraordinary talk on negotiation practice and pitfalls, ‘Winners don’t take all’, Margaret Neale tells us that we escalate our commitment when focus on our sunk costs – the costs that are by definition unrecoverable – instead of our opportunity cost, the value of the alternatives that we do not follow. As a result we send good money, good resources and good opportunities down the drain. Margaret’s strong advice is “Ignore sunk costs. Pay attention to opportunity costs.”

The Hulme supercar story reeks of escalating commitment – as Jack Freemantle says in the interview: “I’ve got guys that when we first talked about it, came up and gave me their life savings. We got 300 grand in a month. Those guys need to be looked after. You can quit on yourself, but you can’t quit on other people.”

Jack’s commitment to his investors is laudable and I can relate to his position more than most, having personally lost money launching a European sports car in New Zealand. The question that he needs to ask himself, however, is whether the best way to make money for himself and his investors is to seek even more investment in this project (which in my and clearly others’ opinion has a low chance of success), or to seek an alternate and more favourable opportunity.

Ignore sunk costs. Pay attention to opportunity costs.