After a farcical 2012 season, in which the New York Jets invented ever new ways to lose games (thus the “butt fumble”), the team’s general manager, offensive coördinator, and quarterback coach are all gone. Yet Mark Sanchez, the starting quarterback, remains. He has played poorly for two seasons in a row, and has now thrown more interceptions in his career than touchdowns. But the Jets have invested an enormous amount of energy and money in Sanchez, and, assuming that no one will trade for him, they are contracted to pay him $8.25 million next year, whether he plays or not. So figuring out what to do with Sanchez will be trickier than you might think.
The Jets have stumbled into a classic economic dilemma, known as the sunk-cost effect. In a purely rational world, Sanchez’s guaranteed salary would be irrelevant to the decision of whether or not to start him (since the Jets have to pay it either way). But in the real world sunk costs are hard to ignore. Hal Arkes, a psychologist at Ohio State University who has spent much of his career studying the subject, explains, “Abandoning a project that you’ve invested a lot in feels like you’ve wasted everything, and waste is something we’re told to avoid.” This means that we often end up sticking with something when we’d be better off cutting our losses—sitting through a bad movie, say, just because we’ve paid for the ticket. In business and government, the effect pushes people to throw good money after bad. The quintessential case of this is the Concorde. There was never a convincing business case for the supersonic airliner, and there were numerous attempts to kill it. But those attempts all failed, in large part because of the billions that had already been spent.
The sunk-cost dilemma isn’t just about waste. It’s also about reputation—after all, the future is uncertain, and if you keep a foundering project alive there’s always a chance that it will right itself. “Giving up on a project, though, means that somebody has to admit that he shouldn’t have done it in the first place,” Arkes says. “And there are lots of executives who would rather be tortured than admit that they’re wrong.” If you’re faced with this problem, it’s tempting to look to those times when staying the course has worked out. After all, plenty of N.F.L. teams have eventually been rewarded for sticking with struggling quarterbacks—most notably, the Giants with Eli Manning. Andrew Brandt, a former N.F.L. executive who’s now a business analyst for ESPN NFL, told me, “When you stray from decisions from year to year, that’s when you get in trouble, unless you have an option so attractive that it’s worth giving up on your current plan.” The problem is that patience is often simply self-justification. The organizational behaviorist Barry Staw, in a 1995 study of the N.B.A., showed that high draft picks consistently got more playing time than lower draft picks, regardless of whether their performance justified it. When executives think they’re being patient, they’re often just being obstinate.
The most intriguing aspect of sunk costs, as Arkes and others have documented, is that greater investment in a project increases people’s belief that it will succeed. That may help explain what happened last March, when the Jets gave Sanchez a contract extension that guaranteed his salary through 2013. Since Sanchez was already signed for two more years, and was coming off a mediocre season, the extension seemed peculiar to outside observers. But the Jets argued, and doubtless believed, that it was a smart way of locking up a young player. It was a classic case of what psychologists call the “escalation of commitment.” Since the Jets had bet big on Sanchez, it seemed reasonable to place an even bigger bet on his future.
So how do you counter this problem? “Taking the original decision-maker out of the picture and letting a fresh pair of eyes look at the pros and cons can help,” Arkes says. He points to a Staw study of a bank that found that loan officers were reluctant to acknowledge that loans they’d made had gone bad, whereas new executives were far more likely to take the loss and move on. Whoever becomes the Jets’ new general manager will have no personal or reputational investment in Sanchez, which should make it easier for him to be more objective, though he’ll still have to persuade the head coach and the owner. New York might also take comfort from the success of the Seattle Seahawks, who showed a remarkable indifference to sunk costs this year. Last spring, Seattle signed the quarterback Matt Flynn to a hefty free-agent contract, a chunk of which was guaranteed. But in training camp Flynn was outperformed by a new draftee, Russell Wilson. The Seahawks put Wilson in the starting lineup, Flynn got to throw only nine passes all year, and the team made it to the playoffs. This happened only because the Seahawks understood that Flynn’s salary was irrelevant. “I don’t want that to matter to me,” the head coach said of the investment. “You want the best guy at that time to play.”
To be fair, the Jets face a harder problem than the Seahawks did: the talent pool of available quarterbacks is small, and, because of the N.F.L. salary cap, they’ll likely have a limited amount of money for signing an alternative to Sanchez. “Unless the Jets get lucky in the draft or bring in a veteran who can remake his career, Sanchez could well be the best option,” Brandt told me. Even so, while the Jets figure out whether Sanchez is the best option, they need to forget—forget how much they’ve paid him, how high he was drafted, and even the fact that the head coach has a tattoo of his wife wearing Sanchez’s jersey. All those costs are sunk. Worrying about them will only insure that the Jets are, too. ♦
