Sunk Costs in NBA

According to the article “Sunk Costs in the NBA” by Staw B, managers will invest money and time in a project when they feel like the project is almost done. From my understanding of the article, sunk costs are losses that manager will take in consideration if they lead towards decision of getting rid of the certain product. Also, I would like to underline that managers do not want to suffer an embarrassment or show their expenditures in publicity, therefore, they will do their best to take personal responsibility in order to avoid sunk costs being a non-potent factor in making decision. It is common sense that managers will use only that resource for what they have paid the most. The author used three analyses to check the theory of sunk costs: role of costs in the decision to use players on the court, prediction of the number of seasons players survive in NBA, analysis of being trade. Results have proved that coaches gave more playing time to their best drafted team players and thus, kept them longer in spite of their injures and trade status.

Staw B, & Hoang, H. (1995). Sunk costs in the NBA: Why draft order affects playing time and survival in professional basketball. administrative science quarterly, 40, 474-494.


Dave Tufte said...

Julia: I see 8 different grammatical errors here, so 52/100.

FYI: Julia is the first student this semester to link to a journal article. Just wanted to let you all know that this is OK by me.

Economic theory says that sunk costs are something that should not be considered when you want to cut a product line. What is interesting about the Staw article is that they show that NBA managers do consider sunk costs. More specifically, a player that is drafted high, and who presumably has already been paid a lot, will continue to be played even when there are better options. In short, managers don't cut their losses.

Jake said...

Managers should cut their losses if a product isn't working as needed. Staw suggested that NBA managers sometimes give even more playing time to the highly drafted players in hopes that the player will become profitable. These managers make "increased investments of playing time to avoid wasting the draft choice."

Staw also has another article that explores this concept of escalating commitment. Staw found that when a someone is responsible for an action that had returned negative consequences, the person (or manager) was very likely to invest even more into the losing product. As managers, we need to remember to make economically sound decisions such as cutting losses before we become knee-deep in the big muddy.

Aiden said...

I think that there is a slight difference between many business investments that we are use to and the investments in NBA players. I don't want to be misunderstood as stating that they are completely different, only that there are some differences. The main difference is that every high draft pick in the NBA is coming with some previously proven experience and results. This is not perfect since the NBA is different from college and not every player can make the transition. The point that I am trying to make is that more time and effort will be given to these individuals that seem to show far more promise than those that have not been drafted that high or that have already shown in the NBA to what level they can achieve. They will always go with that person that could possibly become the best of the best instead of throwing the chance away early, after a little amount of time, to go with the status quo that you already know what you are going to get. Not every top 10 pick has been great, but i can not think of many of the greats that were not top 10 picks. Give them time and hope to land a Great!

Dr. Tufte said...

Jake: 50/50
Aiden: 44/50 for poor capitalization and dropping a word at the end (I let the run-on sentence slide).

Jake: I think your opinion is sound in the situation where there are no fixed costs. But I think Staw's point, which is roughly that we should behave the same way when there are fixed costs, isn't so easy to follow in practice. My guess is that all these managers would say they're not doing this, when in fact they are ... and that's the problem.

Aiden: I think there may be a putting-the-cart-before-the-horse problem with your suggestion. If you make an extra investment in a top pick because they are a top pick, then how, when you observe good players that were top picks, do you know if the cause was their talent or the extra investment?

Jake said...

I agree with you Dr. Tufte. I have personally seen managers (obviously not in the NBA with my height of 5'6") wait and wait for a new person to "turn around" their performance because the manager thinks that this new hire will eventually succeed. In my experience, I have seen some of these high prospects only hurt the organization more while the manager still waits when the manager should actually cut his or her losses before the problem gets worse.

I also agree that these managers would deny or may not even realize that they are hurting their company by not terminating the employment of the person that's just not working out. I can see where a manager wouldn't want to cut the losses since the manager put time and effort in hiring the new employee. In my opinion, I think some of it also has to do with the fact that the manager doesn't want to look bad for making a less than optimum hiring decision. No one wants to look like they don't know what they are doing. This might also have an effect on the reason why managers don't want to cut the losses before they get out of hand. In practice, as you say Dr. Tufte, it isn't as easy to follow, and I believe my aforementioned reasons could have a heavy bearing on why some managers act this way.

I think that it takes a mature manager to be able to admit that he or she has not made the best choice in hiring and then take action to cut the losses. I hope to learn from these types of managers to know when enough is enough. I'm sure that it's a difficult situation to gauge when you're in that manager’s position to decide that it's time to correct your initial decision (by termination of employment) or to wait it out and hope the situation changes.

Dave Tufte said...

Jake: 50/50.

Jake, it's intersting that you live in southwestern Utah and you're saying that. The School of Business at SUU actually gets complaints from employers about our alumni being unwilling to cut their losses on new employees that aren't working out. This is the first business school I've worked at where this was the case. Part of the motivation for developing the Simulated Meetings for this course was to put potential managers in a position where they have to be open and honest about the performance of other students because their grade depends on it. Trust me ... while I think those exercises help, they're not popular with ECON 6200 students.