 I’m selling $5.  The $5 goes to the highest bidder.  Highest bidder pays the amount bid.  Second highest bidder also must pay the amount bid but gets.

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Presentation transcript:

 I’m selling $5.  The $5 goes to the highest bidder.  Highest bidder pays the amount bid.  Second highest bidder also must pay the amount bid but gets nothing in return.  This is real, I will actually pay the money and bidders must actually pay the money. (No colluding or sharing of information)

Escalation of Commitment or Sunk Cost Fallacy  Tendency to justify increased investment in a decision based on the cumulative prior investment, despite new evidence suggesting that the decision was probably wrong.  Sunk Cost: A cost that has been incurred and cannot be reversed.

When to pull the plug… When determination and drive get you into trouble John Hill & Luke Humphries

 What are some of the signs to be aware of?  What keeps us from seeing those signs?

Closing a business is sometimes the wisest business strategy. While it can be hard to separate the emotional side of "giving up" on a business, financially, it can be the right move. There are some signs that can provide an indicator that it is no longer a good idea to keep going: Some initial questions to ask

1. You are losing money at an increasing pace, are continually losing money, or have never made money. 2. The market demand for your product or service has changed. Fads, cycles and consumer preferences change or if your company is offering something the public doesn't want. 3. You are financing your business with personal money, you have run out of alternative financing options and are dwindling your personal savings to keep your business afloat 4. Your line of credit from your primary suppliers has been cut due to inactivity or lack of payment. 5. There are no options for increasing business or targeting new customer segments. 6. Stress over your business is causing you personal, physical or emotional distress. You feel hopeless, or you are damaging relationships that are important to you.

 Do you have the time, energy, and desire to continue the business?  Could the business prosper if it wasn’t servicing old debt?  Could the business prosper if it shed equipment or premises leases?  Could you start a like business if you walked away from this one?  Could you sell this business as a going concern? when-do-you-call-it-quits/

Three psychological factors 1. Reinforcement slot machine example 2. Self-justification need to prove yourself 3. Information bias/confirmation trap Tendency to seek confirmatory information and fail to seek out disconfirming information

How can managers know the difference between the determination to get things done and over commitment? 1 Do I have trouble defining what would constitute failure for this project or decision? Is my definition of failure ambiguous, or does it shift as the project evolves? 2 Would failure on this project radically change the way I think of myself as a manager or as a person? Have I bet the ranch on this venture for my career or for my own satisfaction ? 3 Do I have trouble hearing other people's concerns about the project, and do I sometimes evaluate others' competence on the basis of their support for the project? 4 Do I generally evaluate how various events and actions will affect the project before I think about how they'll affect other areas of the organization or the company as a whole? 5 Do I sometimes feel that if this project ends, there will be no tomorrow? If a manager has answered yes to one or more of these questions, the person is probably over committed to a project.

Mt Everest example Set limits, but failed to follow them 4:00 turn around time Over confidence (downplaying other factors) Sunk Costs (20:54)

Further research ideas: How do other industries, such as pharam, know when to stop drug development? What are other decision making theories and practices I can develop to improve my choice process? What are the biases that I am personally susceptive towards, as well as those within my ‘personal board of directors’

 Ease of recall We pay too much attention to things that we can easily remember, things that are vivid, or things that we have heard recently.  Retrievability We see the world through categories: It’s hard for us to think about things for which we have no frame.  Presumed Associations/Silent Evidence When we have an idea of how to solve a problem, we’ll stop searching for new ideas or evidence.

 Insensitivity to base rates We systematically ignore base rates and pay too much attention to descriptive or recent information.  Insensitivity to sample size We fail to appreciate that the size of the sample really matters. We treat anecdotes as representative of the underlying reality.  Misconception of chance We forget that certain events are independent and that the past has no bearing on the future.  Regression to the mean We forget that over time performance tends to move toward the average.  The conjunction/ disjunction problem We have a difficult time differentiating between a conjunctive event (two events co-occurring) and a disjunctive event (something not happening).

 Anchoring When given some piece of information, we base our estimate on that information and typically make insufficient adjustments to that estimate in light of other evidence.  Risk aversion We systematically choose the less risky of two options, even when rationality (such as expected values) would lead to engaging in the behavior  The hindsight bias Knowledge of an outcome increases an individual’s belief that they could have accurately predicted that outcome, even though the outcome was uncertain.  Overconfidence Individuals rely on their own skills and experience instead of rigorous analysis  The confirmation trap Individuals tend to seek confirmatory information and fail to seek out disconfirming information.