New research reveals the danger in trying to fix failure with friends.
When bad decisions force business leaders to leave their jobs, organizations often rush to replace them with insiders, who are familiar with the original problem and the former leader. In times of turmoil, the choice seems natural and even obvious: Because insiders know the past, they should be less likely to repeat it. General Motors pointedly replaced Rick Wagoner as its chief executive officer with his protégé Fritz Henderson, a career GM employee. However, our research reveals that despite the natural inclination to opt for an insider with connections to the old boss, a failing leader is often better replaced with a completely unrelated outside party.
We conducted research that speaks to one of the most vexing problems that business leaders confront, a phenomenon called "escalation of commitment." Escalation occurs when a decision maker honors resources already invested in a particular course of action (what economists call "sunk costs") by allocating further resources to the same course of action--even though it is failing. In short, escalation of commitment essentially means throwing good money after bad.
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