Decision-making Biases (Scenario)
Frank is president of Mega Manufacturing, a Canadian company that makes automobile parts. Sales and profits are down sharply this quarter, and Frank needs to analyze the series of events that have led to the poor performance. Frank begins by reviewing his recent interactions with Mike, the vice-president of sales.
-Mike asked Frank to authorize the expenditure of an additional $30,000 to continue to pursue the contract with the Japanese car maker,even though there is no indication that they will reconsider their decision.As Mike explained,"My sales team has already spent close to $100,000 in time and effort trying to win that contract.What's another $30,000 to try to convince them to switch to Mega?" Mike's fixation on past expenditures demonstrates which of the following?
A)confirmation bias
B)hindsight bias
C)overconfidence bias
D)sunk costs error

Question

Quizplus · Accepted Answer

Mike's fixation on past expenditures is an example of the sunk costs error. This error occurs when decision-makers focus on past costs that cannot be recovered instead of analyzing the current and future costs and benefits of a decision. Mike's reasoning that an additional $30,000 is insignificant compared to the $100,000 already spent is flawed as it does not consider the potential future costs and benefits of the decision.

Decision-Making Biases (Scenario) Frank Is President of Mega Manufacturing, a Canadian Company That