Loss Aversion: A Solid Business Lesson from an Airplane

While lurking around an entrepreneur’s group on LinkedIn I got hooked by a particular response to a question. I don’t even remember what the question was and, as you’ll see, that doesn’t much matter.
It seems that after 20 years of preparation Concorde made its first commercial flight. I was fortunate enough to be at Miami International Airport to watch the elegant looking plane take off. An awesome spectacle with its delta wing, needle nose and rectangular engine nacelles, Concorde was nothing short of awesome. Loud, too.

Concorde was a magnificent piece of technical engineering, glued together with bulldog tenacity, blind devotion to a concept and the deep pockets of several of the most powerful governments on the planet. The enormous cost overruns on the project became legendary, and thus the point of mentioning the aircraft at all.  

Every entrepreneur spreads his or her wings and leaps from the nest with the loftiest of hopes. Will they fly; make their dream a global success? Or flutter helplessly to the ground below?  With time, money and effort invested the tale is told of either a glorious flight to success or a humble return to base to chart a new strategy.
As recently it became all too apparent to this writer, each of us as business people must consider the financial return on an investment of time, money and effort. I have discovered there is no shame in landing preemptively, and safely, to fly another day.

Beware the Concorde Fallacy
It took the thinking of evolutionary biologists (not sure what they do either) to coin the term “Concorde Fallacy” as a figure of speech for when animals or humans defend an investment — a policy, business or nest — when that defense costs more than abandonment.

Put in plain English, the French and British hung on to Concorde even in the face of it costing more and more to keep the program aloft. Much like what the United States is doing today to bolster the economy – as the saying goes – throwing good money after bad.

But there are true lessons to be learned from the Concorde Fallacy that are applicable to any one of our businesses interests.

The “sunk cost” lesson tells us that deciding to go forward with a business shouldn’t be based on what’s already been spent. For instance, if I put more money, time or effort into this business, project or relationship I might just be able to salvage what I’ve already invested. The logic is based purely on emotion and nothing sound or rational. Just ask the French and British taxpayers if keeping Concorde flying made sense. Ask the grandchildren of today’s Americans if the economic bail out was worth it.

For a solopreneur or entrepreneur a sunk cost argument might sound like, “I’ve got way too much invested already to quit now…” or “We’ve got to put in extra effort, more time…” or “If we just find a deeper belief, a bigger why, we’ll be fine.”

When you know in your gut that your current course is doomed, what you’re now doing is not working gather the courage to pull the plug rather than fall victim to the Concorde Fallacy.

The second lesson can be found in the wisdom of Proverbs 16:18 – “Pride goes before destruction, a haughty spirit before a fall.” Neither the Brits nor the French could let go of a project in which they had spent so much, even in the face of wasting more and more to keep it going. Was their humanness showing? Their emotion? Did they hope against hope to yank it back from financial oblivion and yet make it profitable? No, that was not it, it was their pride.

In a small business, pride can be a driving force, but it can also be a problem. To distinguish the difference you might ask and answer the following question “Do you have a fighting chance or just a chance to fight?”

Bottom Line

Undoubtedly the hardest decision one may ever face is whether to close down a business, to sacrifice the investment for another shot, a different shot. It’s even tougher than that because you never know if the gold is just another three feet from where you stopped digging or tomorrow is the day you close your biggest deal. That’s a tough one.  
Nonetheless, options abound for anyone who has identified his or her passion. If what you are doing isn’t working, if your product or service isn’t getting a fair share of the market, then move on. If you’re business model is broken, it isn’t working for you, re-think or start newly. Don’t let yourself be hoodwinked by wishful thinking.

Take heed the Concorde Fallacy: What are you invested in that you ought to abandon? Will your loss aversion keep you from your heart’s desire?

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Rick Lelchuk

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