My friend started his niche e-commerce business 10 years ago and struggles to grow it beyond a few million dollars in annual sales. He’s smart, hard-working, and good at marketing. He’s capable of building a business at least five times the size. He’s in the wrong business.
Seven years ago, I began documenting and reviewing important life decisions such as investments, large purchases, and big life changes like stepping down as CEO of one of my companies.
My decision-making process includes 19 steps. It starts with “get more options”. Binary decisions — yes/no or this/that — produce inferior outcomes to those with three or more options. I force myself to come up with more options. The list continues with more strategies I learned by studying decision-making science. Here are items 16 through 18:
- Bookend the future with realistic estimates: I predict low, medium, high outcomes for the decision.
- The absolute bottom/maximum I’m willing to accept: Another tool to predict future performance and how I should react.
- Six months from now, what would make me retreat or double-down? What “trip-wires”, or predetermined decision points, can I put in place that must be met for me to keep going forward with this decision in the future?
The purpose of those steps is to reduce the effect of two psychological tendencies that cause us to hold on that which doesn’t serve us for too long.
First, sunk cost bias: we focus too much on how much we’ve invested in something and not enough on the opportunity cost of continuing to invest in it. For example, my friend thinks, “I’ve spent 10 years of my life on this business, I have to see it to the end.” His opportunity cost is a new business he could build that’s five times the size.
Second, endowment effect: we overvalue that which we already own. We often see this in real estate. Owners of a funky house with red walls and Scarface-style marble floors price their house too high. It sits on the market. Nobody buys until they cut the price to the home’s real value. My friend loves his business and thinks it’s worth more than it is, so he waits for a high offer that never arrives.
Before making a big life change, predict the outcomes you hope to achieve. Envision bad, OK, and great results. Decide in advance what you’re willing to accept. Review your decision frequently in the future so you know when it’s time to change something that’s not working.
Where Do You Want to Go?
Many big decisions take years to play out. It’s hard to remember why you started something when the — undocumented — decision was made years ago.
Think back, what did you hope to achieve when you first made that investment of money, effort, and/or time?
Your goals likely haven’t changed much.
Will What You’re Doing Get You There?
Next, apply a decision-making tool that takes removes pressure from being so involved in the situation that you can’t see clearly. Imagine you’re giving advice to a friend in the same situation.
What would you tell your friend to do?
Andy Grove, the famed and admired CEO of Intel used a similar trick to help solve a life-or-death problem at his company. He imagined removing himself from the situation and bringing in a new CEO. What would be the first thing that CEO would do?
It’s easier to create solutions when we’re not the ones in the situation.
Is what your friend (you’re) doing likely to achieve their (your) goal?
Make a Change
Cognitive dissonance is the psychological discomfort we feel when we hold two more conflicting beliefs or when our behavior contradicts our beliefs.
When you clarify what you want and realize that what you’re doing won’t get you there, you feel uncomfortable. Good.
Rather than face reality and make a big change, many keep doing what they’re doing because it’s easier and more comfortable.
It’s better to be uncomfortable and rational than irrational and comfortable.
Make a change.
The easy change is to reduce your goals. More often than not, we reduce goals to avoid discomfort.
It’s easy to say, “Oh, I’m OK if my business never grows beyond a few million dollars.” In reality, if you spend the same hours a day working whether your business is small or large, you might as well build something big. If you wanted to retire and barely work, then, sure, hold on to your lifestyle business. But, if you’re fine working a lot of hours every day, then face reality and build something great. Your time is too valuable.
It’s uncomfortable to sell what you’ve built and start all back over; it’s the right move.
It’s uncomfortable to hire an expensive employee to take over a part of your business you’ve been holding on to. It’s even harder to fire that person and replace him with another when necessary.
It’s uncomfortable to sell an investment at a loss that you should have never made in the first place.
You have one life to live. Face it head on. If what you’re doing right now won’t get you to where you want to go, you know what you must do.