It’s hard for us to admit a project or strategy is failing. Here are three questions to ask about struggling projects and strategies.
Mark Twain once partnered with someone to invent a typeset machine. He thought it would revolutionize publishing and kept sinking more money into it. It soon took so much of his fortune that he was bankrupt. He finally had to admit that the machine was not going to work.
In those days, bankruptcy laws were not kind to people who declared bankruptcy. He went on an international speaking tour as a way to leave the country (and his creditors) to earn money. He sent that money back to his financial adviser in the United States until his debts were paid so he could come back without being sent to jail for bankruptcy.
Why do business leaders have a hard time ending a loser project? Because we are risk-takers that don’t want to admit defeat. Ending the job would for cause us to acknowledge a painful loss. We have sunk our reputation and the company's money into the project.
People are heavily influenced by irrelevant, past sunk costs when deciding what to do in the future. This is the well-known sunk cost fallacy.
Boards of large companies will replace CEOs who are hindered by prior decisions and are reluctant to cut losses. They don't know if the new CEO is more competent than the predecessor, but they do know that the new CEO will be able to ignore the sunk cost of past investments when evaluating the current opportunities.
Hugh Shefrin, in Behavioral Corporate Finance, offers some tough questions for us to ask to avoid these thinking errors:
- Has my definition of what would constitute success or failure changed since the time the project began?
- If I took over my job for the first time today and found that this project was underway, would I support it or terminate it?
- Am I more concerned about the welfare of this project than I am about the organization as a whole?
I wish you the discipline to stop throwing good money after bad. I wish you well.
- Rob Stephens
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