Question

If you became a member of a task force to improve company performance on the following two challenges, what recommendations would you make?

(1) properly motivate your colleagues to define and justify in opportunity cost terms the trade-offs embedded in company decisions

(2) “unwittingly enhance the importance of sunk costs by stiffly penalizing failure”

Answer 1

I would choose option 1 which is to motivate employees and justify opportunity cost in trade off while other option which says you penalize employee in case of failure which can prove disastrous for the company as a fearful employee can do nothing in fear of risk of losing their jobs. If the employee is motivated and know how they have react when they have to trade off between two scenarios where leaving one scenario out can be risky and taking it into account can be even more risky. So you have to decide what whether you should keep it in or out by looking at the opportunity cost tagged with it. Lets say your competitor Firm XYZ is bankrupt and available for sale. You have to decide whether to buy it or not as acquiring it will make you monopolist but you will huge loans while not acquiring it will give you another competitor in the market. In this scenario if the firm have taught employee to take decision in risky situation, they can do so but if you penalize the employee for the sake of failure, they will never be able to take decision on their own and the firm will be dependent on one person, the owner.