Sunk Costs in Negotiations

The ADR Times recently posted an article pertaining the Sunk Cost Fallacy and how it effects relationships. While the article was slanted toward mediation in domestic relations cases, there were some poignant lessons that are applicable in business mediation.

The sunk cost fallacy is an concept in economics that focuses on “the tendency for humans to continue to invest in something [in which] they have already invested a significant amount of time or money.” Sort of like the gambler who is convinced that he can make make his losses by doubling his bet. The gist of the article is people in a relationship need to know when it is time to give up on the relationship because pursuing the relationship is unhealthy.

The same applies to mediation negotiations.

Parties in a mediation, particularly those in business, employment or tort cases, have a tendency to be so heavily invested in the case — be it money, time, emotions or what not — that they cannot find a way to extricate themselves from the mire unless they pound the table harder, demanding to get everything they want. It is up to a skilled mediator to recognize this and help the parties chart a path out.