Tuesday, September 14, 2010

Know When to Fold 'Em

The vendor you've chosen seems slow on hitting the milestones you were counting on.... You hope they pull it together so you can hit your launch date. The new hire you've been interviewing said something to raise a flag... You convince yourself it was out of context and will work itself out when she starts. The incentive plan you envisioneered is rewarding the wrong behavior. You want to give it more time.

You have invested time and money into . You've made a commitment and you don't want to risk a diversion, even though it's irrational.

Exhibit A: In the book Sway, the Brafman brothers describe a Prof. Bazerman's negotiation class at Harvard Business School and his "$20 auction." Prof. Bazerman puts a $20 bill up for auction before his class. The first rule is that bids are to be made in $1 increments and the second rule is that the runner-up must still honor their bid. The auction inches up in price... $14, $15, $16 - until most students get nervous and drop out, leaving just two bidders. The students hanker down - they don't want to be the fool and are committed to paying not to lose. The price soars and always, the Prof. reports, gets to $20 or more. Student's continue bidding, $30, $40, and once getting as high as $204!

Harvard Business School is filled with smart people. Some as smart as you :-). But commitment and loss aversion pull us towards irrational behavior very frequently. You are committed to win (to succeed), and you'll do anything to avoid losing what you have already invested.

Change is a fact of startup life. The best intentioned plans deteriorate, the winds change direction. They change frequently, and often significantly. Business models are tossed and new ones formed. You get the wrong person or a function you don't need anymore. Cut it out! I know much of it's human nature. But think about your decision and state of affairs more often -and try to stop the bidding at $22. Lose the $2 instead of $102. Realize the psychological pull of your commitments and make the uncomfortable and rational corrections. Risk can be good.

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