
One of the hardest decisions to make in life is whether you should continue to invest in something or cut your losses. We face this in our friendships, marriages, investments, businesses, and careers.
When you try to get help with making your decision, you receive a wide range of conflicting advice.
Never stop fighting, never give up.
Yet, youāll never be happy if you canāt learn how to move on.
Nothing replaces persistence.
Yet, smart people know when to quit.
When you get knocked down, get right back up.
Yet, learn from your mistakes and move on to greener pastures.
Youāve got to know when to hold āem. Know when to fold āem.
Why do we struggle so much with this decision? It is impossible to see the future, so we like to believe that we can turn things around and still be successful with our original plan.
Iām sure that optimists feel this way. Of course, things will turn out OK!
However, even the most pragmatic and pessimistic people hate the idea of wasting a great deal of time and money in an effort that is failing. We think that we are smart and make wise decisions, so how could we have been so wrong about this?
The more time and money we have put into something, the greater we desire to make it work out. Failing and losing so much is unbearable.
Thatās why so many of us struggle with decision-making biases influenced by loss aversion. We have all fallen prey to the sunk cost fallacy and thrown good time and money after bad.
Loss aversion
Loss aversion is a powerful decision-making bias. Thatās because losses hurt us about twice as much as gains make us feel good ( from Thinking, Fast and Slow by Daniel Khaneman). Thus, we will spend more energy to avoid a loss than to gain something new.
So, itās no wonder that we struggle with giving up on something that is failing and deciding to move on. The pain of that impending loss is more than we can bear.
Even when we know that we might gain something better (e.g., a new job or relationship), we fear that the positive feelings wonāt outweigh the pain of the loss. Sadly, we are probably right.
We canāt help it. Some propose that it dates back to an evolutionary survival mechanism, so it might be a bias thatās built into our human decision-making abilities.
"ā¦for an organism operating close to the edge of survival, the loss of a day's food could cause death, whereas the gain of an extra day's food would not cause an extra day of lifeā¦" ā source
However, one way that you can try to overcome this bias is to be aware of it and understand how it affects you. When you know that loss aversion is impacting the way you are thinking about a decision, you can use systems and tools to force yourself to evaluate the situation more rationally.
You can also ask yourself questions, such as:
If I pretend that I donāt currently own this, would I still purchase it today, and how much would I be willing to pay for it?
If I ignore the past and pretend as if I had never accepted this job, would I join this company today, in this specific role, and for this level of compensation?
If I ignore my past investments and experiences with my business and pretend that I am not the owner, would I take over this business as it stands today (e.g., examining the expenses, profitability, operational details, etc.)?
Sunk Cost Fallacy
We believe that we are rational about our investments and their future value. Your āinvestmentā could be money (e.g., in the stock market) or time (e.g., in a relationship, job, or profession).
The reality is that the very existence of that investment influences our decision-making ability. We are not objective, rational, or emotionless about a hard decision that we need to make.
The āsunk cost fallacyā is:
āā¦the general tendency for people to continue an endeavor, or continue consuming or pursuing an option, if theyāve invested time or money or some resource in it. That effect becomes a fallacy if itās pushing you to do things that are making you unhappy or worse off.ā ā Christopher Olivola, assistant professor of marketing at Carnegie Mellonās Tepper School of Business
The more time we have invested in something, the harder it is to move on. People stay in terrible jobs long after they should have quit. But, they canāt admit that they made a mistake and wasted years in a company.
The more money we have invested in something, the harder it is to sell it or give it up. People get attached to expensive lifestyles, financial investments, and material possessions. They could get out, but it sickens them to accept the sunk costs.
The problem is, the longer you refuse to move on, the worse it gets. Your losses keep mounting.
However, not only do you incur additional losses, you miss chances to bring good things into your life. You bankrupt your future.
Again, awareness of this fallacy helps you combat it. Sometimes you have to accept that you will never get your investment back out of something, and you certainly canāt recover the time you may have wasted.
A new future begins when you can admit failure and make peace with losing that time and money. Accepting a sunk cost does hurt, but you canāt let it become an albatross around your neck that prevents you from moving on and pursuing better opportunities.
Opportunity cost
When you miss a great new opportunity because you are focused on a failing one, you often donāt get a second chance. Unfortunately, human beings have such a strong aversion to loss that we tend to stay in a bad situation longer than we should.
āSometimes we stare so long at a door that is closing that we see too late the one that is open.ā ā Alexander Graham Bell
The research isnāt straightforward, but we do tend to weight our losses up to 5x more than gains. Itās why we stay in bad relationships, bad jobs, and continue to live with the consequences of bad decisions.
We have invested so much time and money in something that we often donāt recognize when āthe door is closing.ā We refuse to let go and accept that we should move on.
The biggest tragedy of being afraid to lose something and refusing to let go of sunk costs is this:
You sacrifice bigger and better opportunities.
Timing is important. A great opportunity ā that āopen doorā ā wonāt wait around until you finally decide to give up on the closing door and turn away from a failed venture.
Boost your capacity for rational thought
Iāve found that it is challenging to objectively evaluate and compare complex alternatives that have a significant emotional component. Career decisions certainly fall under that category.
Rather than let myself be swayed by the sunk cost fallacy, saliency of specific issues, and other emotional factors, I create a spreadsheet. It enables me to quantitatively compare my choices (e.g., multiple job offers) using a list of factors that are important to me.
I can reduce the impact of loss aversion and refuse to let the loss be weighted more than a new gain. Sometimes seeing the alternatives in black and white, side by side, will make it clear that you should let one door close so that you can confidently walk through the other.
It also helps to discuss the options with a trusted friend or mentor. They have a much more objective viewpoint, of course. If they genuinely are someone you trust, they have your best interests at heart.
There was a time when I was trying to decide if I should keep investing in a challenging situation, and I reached out to a trusted advisor. I explained everything to him, he asked a few more questions, thought for a few minutes, and then he said, āYouāre done there.ā
It was obvious to him what was going on and what my chances were for turning things around. I was too close to the situation to see that as clearly as he could.
Once he uttered those words, it tipped the balance in my head. I decided to move on to a better opportunity.
Iām glad that I did. Iāve never been happier!
On to bigger and better things!
Firmly close those doors that are no longer real opportunities. In your heart, you know which doors you should slam shut, but youāve probably wanted to keep your options open.
That distraction prevents you from clearly seeing new opportunities around you. Accept when something is over, make peace with it, and move on.
Itās incredible how much more energy and attention you can give a new path once you truly clear your mind of the old.
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