Are you working for gain, not just loss avoidance?

Strategic leaders need to recognize when their decisions are driven by a sunk-cost fallacy.

THINK ON IT: Are you working for gain, not just loss avoidance?

In our last Strategic CEO post, we talked about our tendency to focus on magnitude over probability. As important as it is to be aware of the magnitude of upside or risk from a strategic action, it’s even more important to assess the probability of it happening in the first place. 

One of the higher probability events we can count on is making the error of overly focusing on loss avoidance. And the magnitude of the impact on our business can be profound. 

You see, we have a natural bias to avoid loss. Countless psychology studies have shown how we will overly inflate the value of something after we have acquired it. We hate losing something we already have. 

Our emotional attachment becomes higher the longer we hold something, or the harder we worked to gain it in the first place. Think of that stock investment you’ve held for too long out of hope until it trickled toward zero. Even then, you probably hated selling it.

The problem with loss avoidance in business is that we make decisions based on our already sunk cost, and not on whether or not the strategy is still a good one. 

Leaders are told to never, ever give up. And that’s the problem — sometimes we should.  

Loss avoidance can keep us stuck. We can even fall into a winner’s curse, where we pay more for something (in money, sure, but also in time or energy or bridges burned) just because we’re already halfway there.

Strategic leaders need to practice recognizing when their strategy has been taken over by sunk-cost bias, and when they’re more focused on avoiding a loss than making a real gain.

Paid subscribers, read on for how to hedge against loss avoidance bias in your business. Become a Paid Subscriber.

“Perseverance: the courage to ignore the obvious wisdom of turning back." — Despair.com

---

Thanks for being a subscriber to Strategic CEO. If you enjoyed this post, please share it with a friend or colleague.