Money for Sale! I’m selling $5. The $5 goes to the highest bidder. Highest bidder pays the amount bid. Second highest bidder also must pay the

amount bid but gets nothing in return. This is real, I will actually pay the money

and bidders must actually pay the money.

(No colluding or sharing of information)

Escalation of Commitment or Sunk Cost Fallacy

Tendency to justify increased investment in a decision based on the cumulative prior investment, despite new evidence suggesting that the decision was probably wrong.

Sunk Cost: A cost that has been incurred and cannot be reversed.

When to pull the plug…When determination and drive get you into trouble

John Hill & Luke Humphries

How to make a better decision What are some of the

signs to be aware of?

What keeps us from seeing those signs?

Closing a business is sometimes the wisest business strategy. While it can be hard to separate the emotional side of "giving up" on a business, financially, it can be the right move. There are some signs that can provide an indicator that

it is no longer a good idea to keep going:

http://ask.inc.com/when-do-you-decide-to-call-it-quits-1/

Some initial questions to ask

1. You are losing money at an increasing pace, are continually losing money, or have never made money.

2. The market demand for your product or service has changed. Fads, cycles and consumer preferences change or if your company is offering something the public doesn't want.

3. You are financing your business with personal money, you have run out of alternative financing options and are dwindling your personal savings to keep your business afloat

4. Your line of credit from your primary suppliers has been cut due to inactivity or lack of payment.

5. There are no options for increasing business or targeting new customer segments.

6. Stress over your business is causing you personal, physical or emotional distress. You feel hopeless, or you are damaging relationships that are important to you.

Questions from your lawyer Do you have the time, energy, and desire to continue

the business?

Could the business prosper if it wasn’t servicing old debt?

Could the business prosper if it shed equipment or premises leases?

Could you start a like business if you walked away from this one?

Could you sell this business as a going concern?http://www.bankruptcylawnetwork.com/2009/11/30/your-small-business-when-do-you-call-it-quits/

Knowing when to pull the plug, HBR March-April 1987

Three psychological factors1. Reinforcement

slot machine example2. Self-justification

need to prove yourself3. Information bias/confirmation trap

Tendency to seek confirmatory information and fail to seek out disconfirming information

Over commitment How can managers know the difference between the determination to get things done and over commitment?

1      Do I have trouble defining what would constitute failure for this project or decision? Is my definition of failure ambiguous, or does it shift as the project evolves?2      Would failure on this project radically change the way I think of myself as a manager or as a person? Have I bet the ranch on this venture for my career or for my own satisfaction ?3       Do I have trouble hearing other people's concerns about the project, and do I sometimes evaluate others' competence on the basis of their support for the project?4      Do I generally evaluate how various events and actions will affect  the project before I think about how they'll affect  other areas of the organization or the company as a whole?5      Do I sometimes feel that if this project ends, there will be no tomorrow? If a manager has answered yes to one or more of these questions, the person is probably over committed to a project.

http://instruct.uwo.ca/engin-sc/se351a/readings/know_when_to_pull.pdf

Biases and Emotion Mt Everest example

Set limits, but failed to follow them4:00 turn around timeOver confidence (downplaying other factors)http://www.youtube.com/watch?v=dS7g-fremMs&feature=related Sunk Costshttp://www.simpsonslol.com/Watch_511 (20:54)

More infohttp://

www.brighthub.com/office/entrepreneurs/articles/48952.aspx

Further research ideas:How do other industries, such as pharam, know when to stop drug development?

What are other decision making theories and practices I can develop to improve my choice process?

What are the biases that I am personally susceptive towards, as well as those within my ‘personal board of directors’

More Biases Ease of recall

• We pay too much attention to things that we can easily remember, things that are vivid, or things that we have heard recently.

Retrievability• We see the world through categories: It’s hard for

us to think about things for which we have no frame.

Presumed Associations/Silent Evidence• When we have an idea of how to solve a problem,

we’ll stop searching for new ideas or evidence.

Representativeness-based heuristics

  Insensitivity to base rates

• We systematically ignore base rates and pay too much attention to descriptive or recent information.

Insensitivity to sample size• We fail to appreciate that the size of the sample really matters. We

treat anecdotes as representative of the underlying reality. Misconception of chance

• We forget that certain events are independent and that the past has no bearing on the future.

Regression to the mean• We forget that over time performance tends to move toward the

average. The conjunction/ disjunction problem

• We have a difficult time differentiating between a conjunctive event (two events co-occurring) and a disjunctive event (something not happening).

Other Biases Anchoring

• When given some piece of information, we base our estimate on that information and typically make insufficient adjustments to that estimate in light of other evidence.

Risk aversion• We systematically choose the less risky of two options, even when

rationality (such as expected values) would lead to engaging in the behavior

The hindsight bias• Knowledge of an outcome increases an individual’s belief that they

could have accurately predicted that outcome, even though the outcome was uncertain.

Overconfidence• Individuals rely on their own skills and experience instead of rigorous

analysis The confirmation trap

• Individuals tend to seek confirmatory information and fail to seek out disconfirming information.