It seemed like a great idea on paper, but Joe Mwaniki’s plan to put up a flat in his town plot has turned into a very expensive monument. He has sunk millions of shillings into a stalled construction site that’s now a hideout for bhang smokers.
The journey started in 2018. Mwaniki has a sizeable urban plot on which he already has two blocks of single rooms rented out to tenants. He was convinced to put up a block of flats in the space adjacent to the single rooms. He expected the proposed multi-storey building would attract higher-paying tenants and increase his income.
Mwaniki didn't know that putting up a flat is not as easy as building a block of single rooms. Construction stalled in 2019 after the ground floor had been put up. The building remains a shell of unfinished concrete and bits of rusting steel sticking out everywhere. At some point, vandals stole some metal bars, probably for sale as scrap metal.
Mwaniki's neighbours wonder why he didn't simply build another block of single rooms as he had previously done rather successfully. Single rooms are the most popular in that part of town; there are very few flats around. A block of single rooms would have been easier to complete and he would be enjoying the additional rent by now.
A surprising number of people make bad investment decisions that cost them lots of money. It is not only businesspeople who make wrong choices; managers and CEOs have also fallen victim to it, pushing reputable companies into bankruptcy.
Think of the supermarket chains that collapsed due to poor decision-making. A famous Kenyan bank was closed down because directors looked the other way for more than 15 years as the CEO pilfered the institution. Another bank ran into difficulties because the directors awarded themselves billions of shillings in loans to finance vanity projects, such as sports cars. Not forgetting the numerous cases of bad decisions in public institutions.
Bad decisions are costly; they can destroy an enterprise. At small-scale businesses, wrong choices can result in personal bankruptcy. If the loss is too big, the individual may never fully recover to his or her previous financial status.
HOW IT STARTS
Ironically, previous experience with success can push decision-makers into bad choices.
"We always talk about how important experience is. I think we overstate experience because it doesn't exactly fit the situation you're in," Sydney Finkelstein, an author on executive leadership, says.
"You're liable to rely on it in a way that's just not going to be that helpful."
In an interview with the Wall Street Journal, Finkelstein said leaders tend to rely on past experience that seems useful but which could be dangerous. It is not easy to replicate the successes of the past using the same old thinking. In the corporate sector, there are numerous examples of successful managers failing to achieve the same results elsewhere.
Joe Mwaniki, the landlord, believed his experience in building and managing single rooms would be useful in putting up a flat. Turned out that a flat requires much more finances and technical expertise than Mwaniki was used to handling.
Too little experience can be just as bad as too much experience. Glenn Llopis, an expert in leadership strategy, described in Forbes magazine the causes of bad decision-making. They include a lack of experience in leadership, the influence of office politics, lack of self-confidence, losing touch with personal values and inefficient use of resources.
Llopis says lack of self-confidence creates self-doubt, which contributes to bad decisions. Office politics may create a culture of conformity because individuals become more concerned about securing their place in the organisation’s hierarchy rather than making effective decisions.
'NO TURNING BACK'
Mistakes can lead to a chain of bad decisions through the sunk-costs fallacy. We are taught to be persistent in the face of difficulties but when the only justification for completing a particular course of action is the heavy investment put into it, then the decision-maker has fallen into the trap of sunk costs.
Two authors on the sunk-cost fallacy, Veronika Tait and Harold L Miller, found that the larger the initial investment, the more likely for decision-makers to stick to their original plan even when it’s no longer viable. The sunk-cost fallacy mainly occurs where money has been invested but is less likely where the only investment is time and effort.
“If it is money, persisting may offer a chance for the initial investment to be recovered. With investments of time or effort, there is no chance of recovery,” the duo said in their report.
In the case of Joe Mwaniki, his plan to put up a flat should be re-evaluated now that the project has stalled for three years. If he continues with the project because he has already spent lots of money, he would be a classic victim of the sunk-costs fallacy. He might be better off stopping at the ground floor and turning the building into rooms he can rent.
Large companies can survive bad decisions if corrective measures are taken early enough. Small businesses do not have the resources to recover from mistakes; a bad misstep can cripple the enterprise.
Lack of managerial expertise is among the reasons why most small businesses do not see the first anniversary. Many entrepreneurs, even the successful ones, learn how to run business through trial and error.
