05sinking Shots

I Academy of Management Executive, 1996 Vol, 10 No, 3

Sinking shots and sinking costs? Or, how long can I play in the NBA? Jennifer L. DeNicolis and Donald A. Hantula, Temple University Research Translation

Are human beings rational, as economists suggest? Or is human rationality illusory, as organizational psychologists propose? Do we make financial decisions to maximize future value? Or are our choices more likely to be dictated by past decisions? Do we evaluate employees and distribute rewards based solely on their actual performance? Or is our distribution of rewards more likely to be determined by our past expectations for their performance? Barry Staw and Ha Hoang, of the University of California at Berkeley, attempt to answer these questions in an imaginative field study of escalation of commitment and sunk cost effects in decision making by National Basketball Association (NBA) coaches. Escalation of commitment is the tendency to become entrenched in a losing course of action, or to continue to invest in a situation that is likely to fail. One explanation for escalation of commitment suggests that the resources initially expended in a course of action (sunk costs) affect subsequent commitment to that action. Conventional economic rationality strongly cautions against basing future decisions on sunk costs, but economic rationality may not be an accurate description of our behavior. Staw and Hoang looked to the NBA to help determine whether sunk costs affect decisions in real organizations. Using the NBA draft order as a measure of the initial costs of professional basketball players, Staw and Hoang examined the extent to which teams actually used, and retained, their draft picks, even if those players' performances did not live up to the team managers' initial expectations. The study included those basketball players selected in the first two rounds of the NBA draft for the years 1980-1986 who actually received contract offers and played in the NBA for at least two years. The final sample consisted of 241 players whose performance was tracked for at least five years. In order to separate commitment to a player as a result of his draft pick (sunk costs) from commitment because of his performance (sinking shots), performance measured in terms of scoring, toughness (rebounds and blocks) and quickness (assists and steals) was held constant for all players. Other factors likely to affect minutes played and length of stay in the NBA (e.g., injury, trade history, and team won-lost record) were also held constant. Minutes of playing time and length of stay in the NBA franchise were used to measure a team's commitment to a particular player. As might be expected, higher scoring was associated with more playing time and a longer career. However, team-oriented skills did not lead to similarly high

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DeNicolis and Hantula

levels of team commitment to a player. Defensive skills such as rebounding and blocking shots were predictive of career length, but not of playing time, while a player's assists and steals were not associated with either playing time or career length. Thus, contrary to many public pronouncements, it appeared that coaches were basing their decisions on individual performance rather than on team-oriented skills. Interestingly, Staw and Hoang found that players for whom the initial investment was greater, as measured by their higher draft position, had both more playing time and longer NBA careers. Independent of player performance, draft order was highly associated with playing time, career length, and tenure with the team. Each increment in the draft number decreased playing time by 23 minutes, and second round draftees played a total of 552 minutes less in their second years than first round picks. A first round draft pick's NBA career averaged 3.3 years longer than a second round draft pick's. Finally, players drafted in the second round were 72 percent more likely to be traded than first round draftees. After considering several alternative explanations, the authors conclude that initial investment in the player, as reflected in draft number, affects ensuing commitment. Various cognitive and psychological factors have been suggested to account for sunk cost effects, but perhaps these explanations are oversimplified. It may be that the history of the decision makers, cognitive biases, expectations, wastefulness, and the uncertainty of the situation are all interwoven in this type of decision making. For instance, an NBA draft pick is a highly visible investment, and team managers may anticipate public criticism and accusations of wasting talent if they fail to play their expensive players. They may choose instead to provide those players with additional opportunities to play, under the assumption that, with time, their performance will rise to meet the initial expectations held for them. This study contains important lessons for organizational decision-makers. It suggests that the presumption of rationality may, in fact, be irrational. Like previous research in escalation of commitment, it suggests that sunk costs, such as expenses related to initial hiring decisions, will influence the subsequent evaluation of employees and allocation of rewards. As this study shows, the past is prologue.

Source: Barry M. Staw and Ha Hoang, "Sunk costs in the NBA: Why draft order affects playing time and survival in professional basketball," Adminisfrafive Science Quarferiy, 40, 1995, 474-494.

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