Why you should QUIT more often

We often equate quitting to failing and at all costs try to avoid it. To our detriment.

Annie Duke, in her book ‘QUIT’ outlines why you should instead embrace Quitting.

In our society, quitting often signals a feeling of defeat, loss, and even failure. Meaning it is held in a negative light. Often we look back on what we have lost or wasted in the effort when deciding if we should stop, quit or change directions. Annie, in her most recent book Quit, the power of knowing when to walk away, highlights how we should embrace quitting and instead look to the future for the expected value and the potential future loss if we don’t quit.

Annie highlights several individual and societal cognitive biases that may retard our ability to make rational decisions. This is ever more important in the world of investing, where sometimes there is a tendency to preserve our capital and hold onto our losses (in the hopes of breaking even) than preserving our opportunity cost by selling at a loss and moving on.

I have sourced great descriptions from other summaries of the book and rather than reword them, I have included pieces of them in the following paragraphs. To read more about each article and bias, please click on the source link provided.

❌ Loss Aversion

’Refers to a phenomenon where a real or potential loss is perceived by individuals as psychologically or emotionally more severe than an equivalent gain. For instance, the pain of losing $100 is often far greater than the joy gained in finding/earning that same amount.

The psychological effects of experiencing a loss or even facing the possibility of a loss might even induce risk-taking behavior that could make realized losses even more likely or more severe.’ 1

‘We experience a two times greater negative effect incurring a loss than the equivalent magnitude gain. In other words, taking a loss hurts hard, doubly as hard. This tendency can make us risk-averse.

When we are in the gains, we have a tendency to quit too early in order to avoid the risk of giving those gains back. In other words, we like to quit while we’re ahead. When we are in the losses, we become risk seekers. We want to keep going, hoping we can avoid ever having to realize the loss. Daniel Kahneman has characterized this as sure-loss aversion. In other words, we like to stick when we’re behind.’ 2

Take for example you are at the casino and end up winning 100$ in blackjack, upon winning, and being up 100$ and given the choice to play again and potentially double your money or lose it all, we will have a tendency of not playing again.

However, if we are in the losses, and are down $100 and are given the same option of doubling our money or losing another $100, we will have a tendency to take on more risk to get back the money we have lost, so we don’t end up leaving the casino with a loss.

In the world of investing, oftentimes retail investors show this pattern of quitting when they’re ahead and sticking when they’re behind. Even expert investors don’t get their quitting decisions just right. They outperform on their buying decisions but underperform on their selling decisions.

This is behaviour has been coined, an escalation of commitment

❌ Escalation of commitment

‘Escalation of commitment is robust and universal, occurring in individuals, organizations, and governmental entities. All of us tend to get stuck in courses of action once started, especially in the face of bad news.

The escalation of commitment bias is manifest when we persist in following through with an unsuccessful idea or action, rather than admitting that it was a mistake. After experiencing negative results at the beginning of a project, it is sometimes possible to reverse those results by putting in more effort. An ever-increasing cycle of commitment can then occur. When the time and energy invested can no longer be recouped, the motivation to avoid a total loss or to maintain face can lead to continuing efforts in the same direction rather than withdrawing. The more time, energy, and effort invested, the more difficult it becomes to abandon a project. This cognitive bias thus leads to an escalation of unsuccessful actions to justify an initial course of action despite negative consequences’ 3

❌ Sunk Cost Effect/Fallacy

The sunk cost effect is a cognitive illusion where people take into account resources they have previously sunk into an endeavor when making decisions about whether to continue and spend more. The sunk cost effect causes people to stick to situations where they ought to be quitting.

If you ever considered a career change and thought to yourself, “I can’t change careers, because look at all the schooling, the countless hours, and the thousands of dollars I devoted to this career” you are portraying the sunk cost effect.

When deciding whether to stick or quit, we are worried that if we walk away, we will have wasted the resources we have spent in trying.  Other common phrases that exemplify this effect are “If I don’t make this work I will have wasted years of my life!” or “We can’t fire her now, she’s been here for decades!”

The resources you have already spent make it less likely you will quit, which makes it more likely you will accumulate additional sunk costs, which makes it again less likely you will quit, and so on. The growing debris of your prior commitment makes it increasingly harder to walk away.

Knowing about the sunk cost effect doesn’t keep you from falling prey to it. You can’t trick yourself into not taking sunk costs into account by trying to view the situation as a new choice.1

Asking whether or not you would continue if the decision were a fresh one doesn’t mitigate the sunk cost effect the way you might intuitively think it would.

❌ Endowment Effect

The endowment effect is a cognitive bias where we value something we own more than we would if we didn’t own it. We can be endowed to objects but also to our own ideas and beliefs. The endowment effect is an obstacle to quitting because when we irrationally value things we own, we miscalculate their expected value. We might think the company we started, the house we own the project we devised or the belief we have is worth more than it actually is. 1

An example Annie uses in the book is a wine collector who purchased wine many years ago for $5 a bottle, and now is offered 100$ a bottle, refuses to sell saying that was too little for what the wine is actually worth. That same wine collector is then offered wine at 100$ a bottle, which is almost identical to his, that he does not own, and now the wine collector says that wine isn’t worth the $100. The point is that we tend to overvalue our own possessions and very comparable ones we do not own.

❌ Protecting our Identity

When it comes to quitting, the most painful thing to quit is who you are. Our ideas, beliefs, and actions are part of our identity. When new information conflicts with a belief, we experience cognitive dissonance. To resolve the conflict, we can either change the belief or rationalize away the new information. Too often, we choose the latter in order to preserve our identity and more importantly how we think society will perceive us if we were to change our minds. Adam Grant, in his book ‘Think Again,’ delves into why, in order to progress society, we instead should change our minds, and change them often.

Now you are probably nodding your head to a few of these biases and lines of thinking, Annie describes what you can actually do about it.

✅ Develop Kill Criteria

‘As Nobel laureate Daniel Kahneman has said, the worst time to make a decision is when you’re in it, when you are facing down the choice. If you want to eat healthily, it is hard to make good choices about what to eat when a box of chocolates is sitting right in front of you.

The same is true for all decision-making, including quitting. It is hard to make a good choice about whether to stick or quit when you are facing the decision to walk away.

We know from the work on the escalation of commitment and biases like the sunk cost fallacy that we are bad at paying attention to the signals that we should quit when we are in the middle of it. But science also shows that if we imagine what signals we might see in the future that would tell us it’s time to walk away and write them down, this advanced planning will increase the chances that we’ll cut our losses when we ought to.

Essentially, when you make a decision to start something, you can imagine what you could find out later that would tell you the project is no longer worth pursuing. Once you establish these kill criteria, literally criteria for killing a project, changing your mind, or cutting your losses, you can commit in advance that you’ll walk away when you encounter them.

Kill criteria are one of the best tools for helping ensure that you quit sooner when persisting is no longer in your best interest.

For example, if you’re entering an investment position in a particular equity, you’ve clearly researched the reasons to purchase the investment prior to doing so, but Annie stresses, that you should determine the criteria when you should exit the position. If those criteria get hit, then you should exit that position and move on to the next opportunity.

The good news about kill criteria is that you haven’t missed your chance to set them once you have already started an endeavor. At any point along the way, you can think about a future time frame and identify the benchmarks that you might miss or the signals that will tell you that you ought to walk away.’ 4

✅ Find a Quitting Coach

‘Another way to help with the problem of making decisions when you’re in it is to get an outside perspective. We’ve all been in that position where we see someone stubbornly sticking to something when it is clear they should quit, whether it’s a dead-end job, a toxic relationship, or a failing business.

Obviously, if you can see it when someone else is stuck, it stands to reason that other people can see the same thing when they look in on you. It is hard to see yourself clearly. If you find someone to help you with your quitting decisions, you can get that outside perspective that will help you make better choices.

Your quitting coach could be a friend, a mentor, a coworker, a sibling, or a parent.

The key to an effective relationship with a quitting coach is permission. You must give your coach permission to tell you the hard truths, even if those truths might hurt in the moment because you know that is what is in your long-term best interest. Without this permission, your coach will have a tendency to tell you what they think you want to hear to spare your feelings. They’ll have a tendency to cheerlead rather than tell you what they really see.

That’s why it’s so important not just to find someone who has your back but also to give them permission to say the hard things.’ 4

For those who are contemplating a change in their life, career, relationship, faith, and/or investment, I would highly recommend this book and I have personally added it to my  top 10 books of all time

I felt myself nodding my head several times in reviewing my previous decisions and how these biases, albeit, unconsciously, were preventing me from making a rational decision based on a higher expected value.