When Should You Cut Your Losses?

July 16, 2014

I’m a casual poker player.

Say what you will about poker, the game itself can be a very useful allegory for life in the business world. When you play a game like poker, you have a set of cards that are dealt to you. Every move in the game is about evaluating and measuring risk. In fact, on the card table, gambling can be seen as an investment in your available resources and the longevity they may have against the other potential hands at the table. As you weigh the strength of your hand, you will inevitably (or should inevitably) reach a point where a hand you’ve been dealt is incapable of competing, and you will have to fold your hand.

The same dynamic can be true for leaders. At some point, every leader has to face the reality of an underperforming facet of the organization, and sometimes after weighing the risks and the benefits, a cut is necessary. There’s a very good reason why we call it “cutting your losses”: it’s painful. It can feel personal. It’s never easy.

Knowing when to cut your losses is the real challenge. Whether it’s an unsuccessful product launch, an obsolete department within your organization, or even an otherwise productive employee who has developed a toxic attitude – often, we will “stay the course” assuming that if we keep our hand to the plow, we’ll be able to navigate through the situation. As we consider the investment we’ve put into these things, it seems better to push through rather than to take a loss. This could be your downfall.

Two kinds of mindsets when facing a major loss

How we think about the situation has a lot to do with how we come up with a solution. Psychologists identify two kinds of mindsets when facing a major loss:

  • Prevention Focus – concerned with what is lost if we don’t succeed.
  • Promotion Focus – think of goals in terms of new potential gains.

If you adopt a prevention focus, you’re more likely to see all the investments you’ve committed to getting where you are today, making it difficult to cut your losses. If you adopt a promotion focus, you’ll be much more likely to see the cuts as an opportunity to reinvest.

While both positions have merit, studies show that people will more often instinctively take a prevention focus because the effort they’ve invested is a tangible factor in the decision. In other words, they’ve shelled out the money, time, and effort, and they hate to watch it go down the tubes.

Often the promotion focus is the less obvious, but much more fruitful, position. The person sees that there is still money, time, and effort that are yet unspent, and those resources would be better allocated to other investments, rather than continuing to send them down the drain. This is the focus of the visionary.

Knowing when to fold your hand and cut your losses is a great challenge that can’t be taken lightly. Often, the decision to keep going can have as big an impact on your life or your business as the decision to cut. When you face the question of cutting your losses, step back and know your focus: prevention or promotion. It can make all the difference.