Written By Douglas Castle (http://aboutDouglasCasle.blogspot.com) and originally Published in THE NATIONAL NETWORKER Newsletter. Receive your free Newsletter subscription at http://twitlik.com/OK.
Dear Friends:
One of the greatest challenges facing any business decision maker is the ability to be emotionally detached from any investment. Once made, an investment is either good or bad, and the bad ones don't become better by having money thrown at them -- hence the saying "throwing good money after bad." In England, the appropriate aphorism used to refer to an investor who becomes emotionally obsessed with an investment is, "In for a penny, in for a pound."
Con artists have exploited this propensity for people to "protect their investments," by investing even more capital. An investment, once made, is a Sunk Cost. It is history. It is a seed planted. It is a "let's- wait-and-see" (hyper-hyphenation here!) audition. But it is not a measure of the future or an object to be obsessed upon. If it is bad, it should either be held (with hopes of recovery), or sold to cut the loss. The thing to bear in mind is that it does no good to continue to water a dead tree.
People throw effort, money and other things of value at "sunk costs" for no logical reason. We tend to do it to justify our initial decision to invest. Sadly, we assess our own validity as Human Beings by the things which we have done in the past, and not by what we have learned from the past to made us better qualified to build the future. At the risk of sounding like the late Johnny Cochran, we waste to save face . Ultimately, all we do is increase the magnitude of our losses by 1) throwing good money (or assets) after bad, and by 2) losing the opportunity to invest new proceeds in better things.
It is poor business to compound an error just to defer the realization and recognition of a loss. In fact, part of the way in which profits are made is by cutting losses and changing asset allocations.
It is prudent to remember that money is not the only investable asset: we invest time and we invest trust in people, too. And, of course, we do not like to be adjudged (by others or by ourseves, internally) as having made bad decisions -- so we defend and defer poor choices by digging deeper wells where we know that there is no oil. We pretend that we are going for a leisurely swim when we are being sucked under by quicksand because we don't want to look foolish. Ultimately, we hurt ourselves by failing to cut losses and change direction.
Yes...there is much to be said for tenacity and persistence. But there is just as much good to be accomplished by recognizing a mistake and changing our strategy. Not a one of us would respect a cantankerous old employee who has been with the same company for 40 years and complains (but never directly to his boss, as that would force an action) that "my buddies all made better money than I did because they were in the right place at the right time."
Think about it. Look at where you are standing. Examine your circumstances. If you are in the wrong place, get out and find the right one. If that money pit of a home is consuming your entire life's savings, get out!
The logical choices involving any investment (once made), are limited:
1. Hold it, and don't buy more;
2. If you're doing well, continue...but monitor changes and the propensity toward excesses carefully;
3. Sell it, and invest your recovered proceeds in something different;
While passion and drive are necessary propellents for initial entrepreneurial business success, unemotional, objective and timely evaluation of performance of your circumstances (where you are, who you're with, what you're invested in and what other opportunities you might be missing) is absolutely essential.
Part of being an effective leader, manager or decisionmaker is the ability to identify and acknowledge sunk costs (i.e., confront failures) and change direction. It is not embarrassing to make the decision to correct an error -- even if the error was your own.
Don't keep watering a dead tree. Uproot it, use it as firewood or to make furtniture, and plant something new in its place. Pride and emotional attachment have left one too many otherwise gifted businesspersons sitting in the the desert ... in the shade of a dead tree with an empty canteen.
Passion is wonderful. But sunk costs have to be acknowledged, stoppered, and left in the past.
I would respectfully ask that you remember this: the faster you recognize a loss, the more quickly you can move on toward a success. We learn from failures, so long as we recognize them early on, and do not decide to sacrifice ourselves to them.
Faithfully,
Douglas Castle
Labels: sunk costs, bad investments, cutting losses, opportunity cost, failure as an investment in success, Behavioral Psychology, Articles by Douglas Castle, choosing where to spend your time, choosing the right people to invest your time with, early recognition of losses, forward motion, passion versus obsession, love versus logic, defeat versus defense, The National Networker Newsletter, The National Networker Companies, course correction, curbing unnecessary waste, pride and decisionmaking, early intervention, the tradeoff between ego and success, monitoring performance, DonQuixote de la Mancha, Adam J. Kovitz, Twitter, liver and onions, the National Newspicker, Tnnw Buzzworks, GetGlobalEdge, opportunism, minimizing waste...Lingovations!
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