“A lot of people gave very selflessly to build this warship so we can go out and battle the Vikings, but the time has come to admit that hard work and hope are no substitute for actual knowledge and that we've made a really shitty ship. If we sail this ship against the Vikings, we'll be massacred immediately.”
- Ogalf
Sunk-cost fallacy
There are unreplenishable things- time, energy, (often) money, etc. That is, once invested, it's impossible to recover them. These are called sunk costs. That's the easy part; the harder part is getting past the blind spot in our everyday rationality which conveniently ignores the easy part. Like the ship against the Vikings; no matter how selfless the intentions were, the ship must be judged based on robustness, hydraulics, and all things ships solely.
Other everyday examples include continuing to read a bad book just because you've already started reading it, going for a movie (even when you are short of time or interest) just because the tickets have been purchased, etc. And then there are non-everyday examples like the Vietnam war- as casualties mounted in Vietnam in the 1960s, it became more and more difficult to withdraw, because war supporters insisted that withdrawal would cheapen the lives of those who had already sacrificed theirs. Many Americans thought that they ‘owed’ it to the dead and wounded to ‘stay the course’, and that they could not let them ‘die in vain’. What staying the course produced was perhaps 250000 more dead and wounded.
Sunk cost fallacy especially permeates the minds of entrepreneurs. The heuristic ‘don't fall in love with your own idea’ is exactly to warn about this. Entrepreneurs put in a lot of hard work, resources, etc.- but notwithstanding how applaudable this is, it may not be sufficient enough reason for success. Just because they stuck to their ideas doesn't mean that the ideas owe them something.
Loss aversion and opportunity cost
Our decisions are tainted by the emotional investments we accumulate, and the more we invest in something the harder it becomes to abandon it. We literally fear loss much more than we welcome gains. It could be that at some point in our species’ history, the motivation to see something through to completion had a greater probability of ensuring survival. Given that at least some of our ancestors hunted by chasing their prey for extremely long amounts of time, and that agrarian societies require patience over long time frames, it’s not too hard to see why this could be.
The Nobel laureate economist Daniel Kahneman with his colleague Amos Tversky developed explanatory theories and devised experiments to clarify the imbalances between losses and gains in our minds through their work in the 1970s and '80s. Kahneman explains that since all decisions involve uncertainty about the future, the human brain we use to make decisions has evolved an automatic and unconscious system for judging how to proceed when a potential for loss arises. Organisms that placed more urgency on avoiding threats than they did on maximizing opportunities were more likely to pass on their genes. So, over time, the prospect of losses has become a more powerful motivator on our behaviour than the promise of gains. Whenever possible, we try to avoid losses of any kind, and when comparing losses to gains we don’t treat them equally. Dan Ariely demonstrated that this aversion is worse than previously thought. Even when the differences between loss and gain is the same, we tend to focus on minimizing the loss.
That was the machinery behind the stupendous success of the Facebook game FarmVille, at its peak, the number of FarmVille players exceeded the population of Italy. But there was nothing new in terms of gaming aesthetics that FarmVille offered- games with similar concepts and better user experiences were already around. FarmVille was a virtual simulation game in which users were supposed to do virtual farming, that is grow various crops. A caveat was that being inactive even in the virtual farms would deteriorate the crops, and the ways to ensure that your efforts don’t get wasted was to pay real money or invite friends from your social network. This was their secret sauce, the loss aversion- even in virtual world was so huge that FarmVille ended up becoming a cult hit.
That brings us to a closely related concept known as opportunity cost. Opportunity cost of doing something is the cost (economic or otherwise) of foregoing all the other alternatives. That of course doesn't solve the riddle of how to calculate these opportunity costs- especially in the scenario of startups. When you think an idea is cool, and start working on it, you must forego all other (cool or otherwise) ideas. But if halfway you start doubting the coolness of your ideas, loss aversion kicks in and it often becomes very difficult to think about the alternatives rationally. Often entrepreneurs get blinded by their own PR stories, and refuse to discard the non-working ideas. And if you are too confident about your rationality, this anecdote should help- Sean Parker begged Mark Zuckerberg to stop working on Wirehog (file sharing concept) as Zuck still wasn't sure this Facebook thing (even then one of the fastest growing websites on the planet) was going to pan out.
A systematic way to avoid falling in the trap of loss aversion and have increasingly better grip on the idea is the lean model. The nice thing about human judgement is that it learns from the past mistakes- ‘minimum viable products’ give it opportunity to learn. The lean startup methodology promotes shorter product development cycles driven by experimentation and validated learning. More on this in our future writings.
Quit saving sex for old age
Of course there must be some value in taking stands, persistence, etc (or these traits would not have been picked up by evolution and culture). Warren Buffet has an analogy for trying to be too vigilant about the opportunity costs and loss aversion- delaying the decision to take risks for too long is like saving sex for old age.
So, shall we be resolute or shall we quit? In the words of Osayi Osar-Emokpae, ‘Quitting is not giving up, it's choosing to focus your attention on something more important. Quitting is not losing confidence, it's realizing that there are more valuable ways you can spend your time. Quitting is not making excuses, it's learning to be more productive, efficient and effective instead. Quitting is letting go of things (or people) that are sucking the life out of you so you can do more things that will bring you strength.’
A lot of people don't realise there are far more important, urgent problems waiting to be solved. Would you spend your time solving global poverty and building spacecrafts, or sell scented shoes? Steve Levitt calls himself a proud quitter- he attributes his fantastic contribution to economics to his habit of strategically quitting everything he is bad at, even his own ideas in economics he toys with and finds to be bad.
So, quit everything you're bad at, quit your religion if you must, quit bad ideas you're working at, quit lame ideas you’re working on, quit ideas which don’t need you. Just quit it.
References –
- Stephen J. Dubner and Steven D. Levitt, 2005, Freakonomics, William Morrow
- Daniel Kahneman, 2011, Thinking, Fast and Slow, Farrar, Straus and Giroux
- Dan Ariely, 2008, Predictably irrational, HarperCollins
- Eric Ries, 2011, The Lean Startup, Crown Business
- Jon Acuff, 2011, Quitter: Closing the Gap Between Your Day Job & Your Dream Job, Lampo Press
Image Credit : Shutterstock
Related Essays –
What a piece of work is a man!
Following your passion and other absurd ideas
What if Gregor Samsa was an entrepreneur?
In defence of consumerism, the other one
What kills you and me makes us stronger
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