Opportunity Cost

The Broken Window Fallacy and Sales and Recruiting

The broken window fallacy is simple, yet most people don’t get it.  Most news anchors will commit this fallacy whenever there’s a hurricane, and in the aftermath they say something along the lines of, “But at least the rebuilding will lead to a boost in economic activity for the area…”  It goes like this:

A kid breaks a window, the glazier comes and repairs it, and everyone shames the kid, but one person says, “No, look at the money the glazier earned, so the kid actually committed a ‘good’ for the economy.”  This comes down to what is seen vs unseen.  People see the transaction between the window’s owner and the glazier, they don’t see the suit, or the computer, or anything else he might have bought if he didn’t have to repair his window.  At the end of what’s seen, he just has a window.  He had to expend resources to the simply get to where he already had been.  If the kid hadn’t broken the window, the guy would have had the window and something else; a suit, a computer, etc.  The opportunity cost, in other words.  The opportunity cost is always unseen.

This is somewhat applicable to sales people who perpetually go after bad accounts, a massive problem in the recruiting industry.  They always want to ‘get in’ to that account, as if it’s the end all be all of existence.  Sometimes this works, they get in, and one in a million times the account starts to generate revenue.  The problem is most times, this does not happen.  The sales person is perpetually trying to ‘get in’, and wasting time and resources that are unrecoverable.  And even if they invest thousands of man hours and untold monetary resources ‘getting in’ with that account, even one placement is enough to make the Sales guy say, “See?!  See?!  I told you we could get in there!”  They’re so fixated on the moment of closure that they literally think that erases all the previous losses. Now, imagine the resources spent ‘getting in’ with that one account were spread over accounts with higher response rates, or developing new accounts.

It is necessary to be aware of opportunity cost when managing people and processes.  Sales people have no concept of opportunity cost, that is why they make such shitty managers.

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