According to the book Sway: The Irresistible Pull of Irrational Behavior
In 2000 I bought Cisco stock for, at the time, a low $56 per share. It was my first chance to dip my big toe in the water of stock market investing. Almost all analysts said it was a great investment – it had historically proven strong. With the bonus incentive that Cisco had made many investors millionaires.
But then the Internet bubble burst and Cisco stock started dropping. It went down to $50 a share. Then dipped to $45.
I decided if it hit $40 I’d sell. Well, it breezed right on past $40 to around $37 and I still didn’t sell because I wanted it to go back up to $40 and Then I would sell. It never hit $40 again. So I set a new figure. If it hits $35 a share, then I’ll sell. Sadly, I still didn’t sell. I kept riding it out. How far? I’ll tell you in a minute.
But first, if you look at the behavior of riding out a dropping stock, you’ll notice it seems like irrational behavior, no?
So why would a seemingly rational person (me) make an irrational decision like ride out a falling stock for his first investment in the market?
Playing not to lose and losing anyway…
Irrational decision making by normal people is what Sway is all about. After all, my Cisco investment experience went from a simple test of the market to losing my entire leg to the sharks of Wall Street. And although I haven’t completed the book, the chapter about playing to lose is brilliant. They call it the “Swamp of Commitment”. I know that I must be careful with my commitments otherwise I’ll drown in that swamp. It explains my behavior in my Cisco investment very well.
So why would I have continued such a mistake? According to the authors Ori and Rom Brafman, in staying with my investment, I was chasing a loss. Much like a gambler who sits at a blackjack table until the repo man takes his car, I went against everyone telling me to “Brad, for the love of God, get the F— out of CSCO!!” I simply hoped to recover the money I had lost. Sadly, I sold out in 2002 for approximately $16 a share.
Before you put on your best Fred Sanford impression and scream “You big dummy!” I’ll note that playing to lose in this instance isn’t confined only to me or my actions. It’s quite common.
- A salesman who takes actions against his company’s best interest so he won’t lose a customer – instead of trying to win more customers.
- A wife who says things she’ll regret later to her husband so she won’t lose an argument instead of playing to win by formulating a solution where both would win.
- A group of Harvard MBA students who traded $200 for a $20 bill instead of cutting losses at $10 and going home (example from the book.)
Loss Induced Stress
Losing what we have is stressful. We not only experience a gap, we often have to deal with remorse of losing in the first place. Friends question us about the loss. For me, on each successive downturn of the stock, it made the loss greater, thus, the pressure to recover was even more intense.
This leaves me with a number of questions. First and foremost: If we have a tendency to act irrationally at times in order to avoid loss and we know in hindsight that it’s not good for us, how can we tell ahead of time whether we are acting out of the irrational fear of loss or not?
For instance you know I am persistent, it’s the name of my blog! I think sticking with things is one of the cornerstones of success. But how do you know what to stick with and what to drop? I am hoping Sway answers these questions for me.
Avoid Playing Not To Lose
Here are five of my ideas based on experience on how to avoid acting irrational out of fear of loss:
1. Plan before major investments of time, money or energy - Considering an investment in hard earned money? How about investing months of your life into a new project? I think it’s crucial that there’ll be a plan in place. How long do you expect to stay in before the payoff happens? What is an acceptable loss? Be it time, money or energy, how much can you stand to lose in this investment?
Example: A lot of people want to start a blog but they give up after the first month. That’s definitely not enough time. But what is enough time?
2. Set a deadline for progress - Decide on how long you will stick with the investment for it to show a return and stick to it. On the date of your deadline, take an accounting. Are you showing the expected progress or is it more or less. In investing money are you showing more money? In the investment in a project, is the project close to completion?
Example: If you have started a blog and your 6 month deadline was up. You would want to see the results of your dedication. Do you see a profit in ad revenue or have you reached your goal 500 readers? Are you at least close to your intended results?
3. Simply ask yourself if you are taking actions to avoid loss - This step will take some soul searching. But here is a tip. Think of all the times you have said “I have to do… or else____ will happen.” If you are taking a compulsive action to avoid something from happening, you are likely playing to lose.
Example: We all have a “whipped” friend or two who jumps through seemingly crazy hoops to please their significant other. We wonder how a guy can baby talk on the phone 5 times a day. We wonder how a woman will put up with a cheating husband. I am sure the thought “I have to do this or they will leave.” has crossed their minds.
4. If it’s not working, consider restructure - if you created something like a blog for people who like jaywalking and you find that you have absolutely no readers. What else could you spin your idea into that would be successful? Perhaps a blog on walking for fitness would be more successful. In my stock investing example, I could have traded Cisco stock when it hit the emergency level of $40 for something outside the technology sector.
5. Give up gracefully and learn - At the end of your deadline, you may decide what you are doing is not working. Also, there is no satisfactory way to restructure it. Many business partnerships work this way. One person wants out the other doesn’t. One person does the bulk of the work, the other is a lazy jerk. In the case where your deadline comes and you are showing no progress and it doesn’t appear progress in on the near horizon. Give up gracefully.
Giving up gracefully means not beating up on yourself or others. It also means not giving up on yourself. Take your loss in stride and learn from it. While many people will stick with a long failing business because of the fear of loss, they never consider what they gain by letting it go. They don’t consider the free time they’ll have to do other things. They don’t consider the money they’ll recover since it’s no longer going into a bottomless pit. They don’t consider the valuable knowledge that can come from failing at a business. Only through failing can they know at a reflex level dozens of actions not to take in their next venture.
I’m sure you have some ideas on diagnosing irrational behavior and stopping it. Please share your ideas in the comments.
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