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Innovation processes, Shakespeare and human nature: the Macbeth effect

"I’m so deep in this bloodshed that if I stopped this business now, going back would be as difficult as continuing all the way". (Macbeth, III, 4 di William Shakespeare)

I have always been fascinated by the way Shakespeare encapsulates Macbeth's journey towards the unknown with just a few words. It doesn't matter how his journey began; what matters is the clear perception of the so-called "point of no return." The elegance of this phrase, recited by Macbeth in the third act of Shakespeare's play, conceals a condition that can emerge as a consequence of every significant action in our personal and professional lives.

The condition that Shakespeare describes is also known as the "Macbeth Effect". It summarizes a perception that leaves no room for choice and is based on the clouded belief that by continuing along the path, one will find clarity or a solution to the current state.

This effect manifests in many areas of private and professional life, where our decisions often begin with phrases such as: "It costs nothing to try," "There's so little risk" or the bolder, "If he did it, I can do it easily too".

In professional life, the Macbeth effect is often accompanied by a sort of industrial mystique, epitomized by impressive aphorisms on office walls, like a Steve Jobs poster with a motivating quote, similar to how a photo of Marilyn Monroe might adorn a hair salon.

The Macbeth effect arises from an approach that leads us to develop a high propensity for risk, neglecting any form of control and measurement of current and expected results. By its nature, the Macbeth effect is linked to the exploration of the unknown, often found in innovation, research and development, and invention processes. Anyone embarking on a path without adequately analyzing its risks or duration can find themselves in the same position as Macbeth.

The Concorde project

Industrial history has numerous failures linked to the belief that there is no turning back, with no escape routes except continuing forward. A notable example is the Concorde project, a supersonic aircraft produced by the Anglo-French consortium of British Aerospace and Aérospatiale. The Concorde was one of the most ambitious innovation projects in aeronautics history, beginning in the late 1950s and seeing the first prototype take off in March 1969. It wasn't until November 4, 1970, that the aircraft first reached Mach 2, becoming the second commercial aircraft to fly at that speed, after the Soviet Tupolev Tu-144. This historical context helps us understand the decisions leading to the first flight in 1976 and its disastrous failure in October 2003. Although many believe its decommissioning was due to the July 2000 disaster, the truth is that its abandonment was due to the massive consumption, unsustainable maintenance costs, a small number of passengers (due to the high flight price), and often questionable marketing choices. The tragic accident in Paris merely accelerated the closure of the Concorde project, as the French and British governments had been covering its budget deficit despite clear financial evidence against its sustainability. This persistence is a classic example of the human tendency to continue a project without considering future benefits, focusing instead on past efforts and investments.

The opportunity cost and sunk costs

The analysis of future advantages is described in economics by the concept of "opportunity cost," which defines the future value of one's choices based on the cost of forgoing an alternative opportunity. Essentially, it is the sacrifice made to make a choice. However, in evaluating investments, assessments often give more weight to "sunk costs." To illustrate this dynamic, imagine being at the head of a research and development project with an uncertain outcome and having 100,000 euros to invest.

Consider two scenarios: in the first, you have already invested 500,000 euros and can close the project with an additional 100,000 euros; in the second, you haven't started the project yet and can invest your 100,000 euros to begin activities with an uncertain outcome. How would you act? You are likely inclined to invest in the first scenario, considering what has already been done. But any answer is neither correct nor wrong because the question itself is flawed. The correct question should be: "What is the opportunity cost in the current state of the project?" Only this question provides the logical basis for making our choice.

Cognitive distortion in the analysis of sunk costs

The incorrect evaluation of sunk costs is due to a cognitive distortion known as the "Sunk Cost Effect," evident in the Concorde case, where heavy investments by the French and British governments led to further investments even when the project's financial unsustainability was clear. This bias reflects a paradoxical behavior: when we have invested significant effort, time, and money into a failing project, instead of abandoning it to limit losses, we tend to continue investing, exacerbating our losses.

You might think this wouldn't happen to you, but consider a fixed-menu restaurant where you're almost full but have already paid for dessert. You might order and leave it on your plate because you paid for it, demonstrating the sunk cost fallacy. This phenomenon also occurs in relationships, where people maintain unhappy, unsatisfactory relationships to avoid "wasting" the time spent together.

Friedman's cognitive dissonance

Daniel Friedman (University of California-Santa Cruz) explored this in his 2007 study, “Searching for the Sunk Cost Fallacy.” He describes the psychological mechanisms underlying bad decisions related to sunk costs. According to Friedman, bad decisions stem from "cognitive dissonance," leading to continuous self-justification. People who invest in an unprofitable activity modify their beliefs about its profitability to avoid admitting a mistake. Cognitive dissonance varies among individuals; anxious people are more sensitive to uncertainty and tend to continue investing despite likely failure, whereas depressed individuals are more likely to stop investing due to unrealistically positive future expectations.

The escalation effect

The behaviors driven by the Macbeth effect demonstrate that distorted perceptions of sunk costs have costly consequences in terms of money, time, and effort. A more severe form of the Macbeth effect is the "Escalation Effect." When a project begins to fail, sunk cost bias irrationally pushes individuals to make even more investments, leading to further losses. This growing spiral of investment is also known as the “Vietnam Effect,” explained by conditions during the US Vietnam War. According to Secretary of State George Ball's 1965 memorandum to President Johnson, retreating becomes impossible as soldiers die, leading to more investments to avoid their deaths being in vain.

The roadmap of madness

My professional experience has allowed me to observe the Macbeth Effect and the Escalation Effect closely. The lessons I've learned can be summarized in a path of increasing investments, which I call the "roadmap of madness." This path is common to the projects analyzed for this article and unfolds in the following steps:

  1. Someone decides to solve a business/personal problem or unleash their creativity with a proprietary technical solution.
  2. The inventor presents the product, and a manager decides it has potential.
  3. Based on a superficial market check, the manager convinces the chain of command to allocate the budget to develop the product.
  4. The team develops a testable version, and the sales force begins work.
  5. Poor commercial results prompt more investment to avoid wasted efforts and reputational damage.
  6. Even an expert sales force fails to deliver results, prompting internal adoption of the product, which also fails.
  7. The manager, confident in the product's potential, sets up a new company to handle it.
  8. Further failures lead to seeking new investors.

The end of this roadmap is uncertain, but it is unlikely to be pleasant given the described path. My experience with two now-bankrupt companies (a cloud operating system and a procurement platform) has taught me to pay close attention to the Macbeth effect, as in real life, the curtain can indeed fall.

Article source: Linkedin Article by Vincenzo Gioia

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Vincenzo Gioia
06/05/2024
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