Failure Costs

Some of the worst decisions I’ve ever made or seen made occurred when the perceived failure costs were high. Humans will inherently overestimate their probability of success if the cost of failure is high. Even if subsequently failing has even higher costs.

If the cost of failure is higher than the acceptable threshold and there exists some human-driven solution that will mitigate that failure then the human will choose that solution independent of the probability of success or the perceived cost of additional failure.

Let’s imagine an action has failure cost C. Let’s imagine that X is the threshold at which the decider deems failure unacceptable. Let’s imagine P to be the probability of success when performing action A to avoid failure cost C. Let’s imagine P’ to be the perceived probability of success when performing action A to avoid failure cost C. Let’s imagine Z is the cost of failing on action C.

So if C > X then human will chose option A independent of P or Z. Humans typically do so by assigning P’ a higher probability of success than P and ignoring Z.