When Managers Make Poor People Decisions Because of the Sunk Costs Fallacy

Anyone who has ever managed in mortgage banking has had a discussion with their supervisor regarding employees who are not working out as planned. The conversation usually goes something like “If we invest more time and money into this underperforming salesperson, he or she will turnaround and improve.” The problem with this approach is that if the employee is the result of a poor hiring decision, no amount of training or coaching will make a difference in that producer’s sales results.

When deciding whether to keep investing in an underperformer, managers must determine the core issue: Is the salesperson failing because they don’t know how to do a specific activity (i.e. prospecting, closing etc.) or is it a matter of not being a match for the originator position?

When companies and managers continue to invest in sub-par originators, they are not only risking limited resources but are avoiding the real issue of cutting their losses and moving on. This is a great example of the sunk costs fallacy.

The sunk costs fallacy is all about not wanting to quit things that we have started. The thinking goes that since we cannot recover these costs (if a large guarantee was paid for example) we might as well try to save our investment. While there may be certain times when this makes sense, holding on to consistent underperformers hoping for better results is more often than not, money down the drain.

Consistent underperformers must be recognized as poor hiring decisions who are taking up valuable resources that could be used elsewhere. In a perfect world, managers would recognize hiring mistakes, address the issue and change their course of action. Unfortunately, this is not what I see during consulting engagements. Just recently a large mortgage banker decided to spend a half million dollars to train underperforming originators who were not making budgeted goals. The result? This investment has not generated much improvement but has wasted a lot of money and delayed something that management should have addressed a while ago: that there is a mismatch for the originator position.

While sunk costs make it difficult to end a doomed relationship, the sooner it is addressed is the better for everyone. While neither party wants to say that the relationship is not going anywhere and must end, letting it continue does neither party any good. Most importantly, the top performers will surely see that management lacks the courage to take action.

One possible solution for our industry is something that Zappos does: It pays people to quit. In his excellent book, “Under New Management,” David Burkus describes what Zappos does in offering a quitting bonus to its employees. Burkus says “Companies that pay people to quit are acting rationally and ignoring sunk costs. They realize that they can’t really resolve the problem by investing more time and money in a person who isn’t a good fit.” The 2 to 3% who take the quitting bonus make all the difference in the company’s culture.

In my experience, underperformers know in their hearts that the originator’s position is not a match for them. Maybe they were a better fit when interest rates were declining but now that they have to generate their own purchase money volume they do not want to put in the time and effort to succeed in a more difficult marketplace. This isn’t a training issue; it is a hiring mistake. The sooner companies see this and act, they can avoid the sunk costs fallacy.