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Published: February 18, 2010

 
 

Why Outsiders Are Better in Turnarounds

Even a loose psychological connection with a failed predecessor can cause leaders to reinforce bad decisions.

Title:
Vicarious Entrapment: Your Sunk Costs, My Escalation of Commitment
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Authors:
Brian C. Gunia (Northwestern University), Niro Sivanathan (London Business School), and Adam D. Galinsky (Northwestern University)

Publisher:
Journal of Experimental Social Psychology, vol. 45, no. 6

Date Published: 
November 2009 

When a business is in the midst of crisis or collapse, it’s not uncommon for shareholders to replace failed leaders with insiders who are familiar with the organization’s culture, problems, and history of bad decisions. But this paper finds that when new decision makers share even a loose psychological connection with the old boss, they are likely to support their predecessor’s decisions by continuing down the same path. The researchers argue that outsiders are better equipped to turn around failing companies or projects, citing, for example, Salomon Brothers’ appointment of the “ultimate outsider,” Warren Buffett, to correct misdeeds committed by former executives.

The researchers conducted four experiments to test their theory of “vicarious entrapment,” which holds that a successful solution depends on creating a psychological break between the failed decision maker and his or her replacement. For example, if the two decision makers are aware they have the same birthday, the researchers found, it is a strong enough bond to create a psychological connection that leads to continued bad choices. In one test of personnel decisions, study participants who empathized with or shared a viewpoint with the initial decision maker gave a bigger raise to an underperforming candidate who had been hired by that individual than those participants who did not share a connection with the initial decision maker.

Businesses and even political organizations trying to disentangle themselves from a string of bad decisions should carefully consider the benefits of bringing a real outsider into the problem-solving role, the researchers conclude. Although it might take true outsiders longer to integrate into their new environment and fully grasp the problems, they may be able to act more decisively once they do. Their psychological disconnection from the past allows them to act more independently and to reverse the previous failed course.

Bottom Line:
Shareholders looking to turn around their organization should consider introducing an outsider as leader. A different perspective and a lack of psychological connection to the old boss enable the new leader to make better decisions.

 
 
 
 
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