Clear thinking is needed on the future of Giants Ridge

The Giants Ridge resort is such a big part of the state agency leading economic development on the Iron Range that the resort received its own chapter in a highly critical Office of the Legislative Auditor report that came out last week.

The OLA staff did such a thorough job on the topic that there's only really one big, unanswered question left: Why is Giants Ridge still open?

This ski and golf resort lies near the northeastern end of the state's Iron Range in St. Louis County, and it's lately been a consistent money loser. If businesspeople ran this operation, it likely would have been sold by now if not shut down.

The agency that owns it, the Iron Range Resources and Rehabilitation Board, has defended Giants Ridge in the past as both an economic engine and a recreational amenity in the heart of the IRRRB's service territory.

The IRRRB's history with Giants Ridge began in the mid-1980s, when Giants Ridge had gone bankrupt during a brutal mining industry downturn. The agency then bought the resort.

It was just a modest investment, but the agency bought new ski equipment, built a new chalet and an 18-hole golf course and then another golf course. Most recently the IRRRB decided to invest an additional $9.9 million in a new event center.

Having a state agency direct tax revenue wrung from the mining industry into a golf course is by itself a decision worth some debate. But the legislative auditor gives far more space in its report to discussing the decision to fund operating losses that have kept growing, including a $4.3 million operating loss for fiscal 2014.

As the auditor pointed out, in 2014 Giants Ridge sold about 37,000 ski, snowboard and snow tube passes, down 30 percent from a decade earlier. That kind of information makes it tempting to conclude that Giants Ridge must have been mismanaged, although that is not really fair.

As it turned out, the auditor said, a report showed that the resort's Minnesota market share of about 6 percent in the 2013-14 season was about the same as it had been during the winter of 2003-04.

In fact industry conditions have gotten so bad that a little over a year ago an industry veteran shocked attendees at a big snow sports trade show with a dire prediction that nearly a third of the nation's 470 or so ski resorts would soon be history.

Giants Ridge also has a summer season, and the legislative auditor noted that golf rounds played at Giants Ridge have declined by 25 percent between fiscal years 2005 and 2014.

Given all that, maybe an operating loss of just $3.8 million, the loss in the fiscal 2016 IRRRB budget, should be considered something of a business achievement.

Again, it's not fair to criticize public officials for irrationally keeping open a money loser, at least not without also pointing out that corporate executives routinely show they can be plenty irrational when thinking about quitting a line of business.

One common-sense explanation is that we humans have a whole set of cognitive biases that keep getting in the way of clear thinking when we try to decide whether to do something as painful as selling or shutting a business, as laid out in a classic article by the global consulting firm McKinsey & Co.

These biases were how McKinsey explained the decision by General Motors to keep its unprofitable Saturn division going for years, even deciding to invest an additional $3 billion 10 years after Saturn unit sales peaked at far short of Saturn's annual sales goal.

One of the biases is so common that it probably even gets taught in high school economics classes, something called the sunk cost fallacy.

That's when managers resist selling or liquidating a business because they can't stop thinking about all the money they have already invested in it. If the business is sold for peanuts or boarded up, that money never gets earned back.

A closely related idea is called an escalation of commitment. That's when managers find out that investing $10 million didn't cause the sales to increase, and then they somehow talk themselves into the conclusion that the right thing to do is to invest $10 million more, assuming that this time sales trends will certainly turn up.

Then there's the anchoring bias, the mental process that is running in the background that leads managers to stick to their original forecast of great results, no matter how much evidence piles up showing that maybe the forecast was unrealistic from the start.

The best managers recognize this kind of fuzzy thinking and keep the focus on what needs to be done. It's important to understand also that arguing for a shutdown doesn't mean they care nothing for staff members who might lose jobs. What they care about is not wasting their capital.

That's the key consideration here. What would happen if instead of funding more losses that capital was spent on something productive? That should lead to a growing operation with a growing payroll, to say nothing of growing payments to local vendors.

That's the reason to press the IRRRB for clear thinking on the future of Giants Ridge, not because the operation has lost a lot of money in the past. It's the waste of having to fund a loss of $3.8 million this fiscal year, the $3.8 million loss maybe coming next year and the $3.8 million loss the year after that.