How to Cut Your Losses When It’s Not Working
Learn how to make it easier to cut your losses and move on.
Posted February 10, 2011
Sometimes, you don't know when to throw in the towel. As time passes, it becomes clear that things aren't working out as you planned. You realize that pursuing whatever it is that you're pursuing - whether it's being successful in your current career, mending a troubled relationship, or renovating your house from top to bottom - will cost you too much financially or emotionally, or take too long. But instead of moving on to new opportunities, all too often you simply stay the course and sacrifice your own wellbeing in the process.
You aren't alone. Most of us know what it's like to stay in a job or a relationship long after it has ceased being satisfying, or to take on a project that's just too big for us and be reluctant to admit it. CEOs have been known to allocate manpower and money to projects long after it's become clear that they are obviously failing, digging a deeper hole rather than trying to climb their way out of it (Remember how long it took to get rid of New Coke?)
The costs to the person who can't see reason, in terms of time, effort, and lost opportunities for happiness, can be enormous. We recognize this kind of foolishness immediately in others, but that doesn't stop us from making the same mistake ourselves. Why?
There are several powerful and largely unconscious psychological forces at work here. We may throw good money after bad, or waste time in a dead-end relationship, because we haven't come up with an alternative, or because we don't want to admit to our friends and family, or to ourselves, that we were wrong. But the most likely culprit is our overwhelming aversion to sunk costs.
Sunk costs are the resources that you've put into an endeavor that you can't get back out. They are the years you spent training for a profession you hate or waiting for your commitment-phobic boyfriend to propose. They are the money you spent on redecorating your living room in the hot new style, only to find that you hate living in it.
Once you've realized that you probably won't succeed or that you are unhappy with the results, it shouldn't matter how much time and effort you've already put into something. If your job or your boyfriend have taken up some of the best years of your life, it doesn't make sense to let them use up the years you've got left. And an ugly living room is an ugly living room, no matter how much money you spent making it so.
The problem is that it doesn't feel that way. Putting in a lot only to end up with nothing to show for it is just too awful for most of us to seriously consider. We worry far too much about what we'll lose if we just move on, and not nearly enough about the costs of not moving on - more wasted time and effort, more unhappiness, and more missed opportunities. So how can we make it easier to know when to cut our losses?
Thanks to recent research by Northwestern University psychologists Daniel Molden and Chin Ming Hui, there is a simple and effective way to be sure you are making the best decisions when a things go awry: focus on what you have to gain, rather than what you have to lose.
As I've written about before, psychologists call this adopting a promotion focus. When we think about our goals in terms of potential gains, we automatically (often without realizing it) become more comfortable with making mistakes and accepting the losses we may have to incur along the way.
When we adopt a prevention focus, on the other hand, and think about our goals in terms of what we could lose if we don't succeed, we become much more sensitive to sunk costs.
For example, in one of their studies, Molden and Hui put participants into either a promotion or prevention mindset by having them spend five minutes writing about their "personal hopes and aspirations" (promotion) or "duties and obligations" (prevention). They also included a control group with no manipulation of mindset.
Next, each participant was told to imagine that he or she was president of an aviation company that had committed $10 million to developing a plane that can't be detected by radar. With the project near completion and $9 million already spent, a rival company announces the availability of their own radar-blank plane, which is both superior in performance and lower in cost. The question put to participants was simple - do you invest the remaining $1 million and finish your company's (inferior and more expensive) plane, or cut your losses and move on?
Molden and Hui found that participants who had been put in a prevention mindset (focused on avoiding loss) stayed the course and invested the remaining $1 million roughly 80% of the time. The control group, included to provide a sense of how people would respond without any changes to their mindset, was virtually identical to the prevention group. This suggests that when things go wrong and sunk costs are high, most of us naturally become prevention-minded, and more likely to try to keep waging a losing battle.
The odds of making that mistake were significantly reduced by adopting a promotion mindset (focused on potential gain) - those participants invested the remaining $1 million less than 60% of the time.*
When we see our goals in terms of what we can gain, rather than what we might lose, we are more likely to see a doomed endeavor for what it is, and try to make the most of a bad situation.
It's not difficult to achieve greater clarity if you make a deliberate effort to refocus yourself when making your decision. Stop and reflect on what you have to gain by cutting your losses now - the opportunities for happiness and growth. If you do, you'll find it much easier to make the right choice.
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*Why not a bigger drop? Good question. Remember that promotion focus was manipulated very indirectly through a totally unrelated writing task. If you adopt a promotion focus directly with respect to the decision itself, considering what you could gain by moving on from your failure, the effects should be even stronger.