Never Give Up? That Could Be a Mistake
What's the single most important characteristic to an entrepreneur? Thomas Edison, as die-hard a businessman as any, said that genius was one percent inspiration and 99 percent perspiration.
You could probably extend that statement to starting a business.
Persistence is a key to success. Give up at the first (or second or third... or hundredth) try and you'll never get anywhere. But a recent study from Oregon State University suggests that the drive for persistence can cloud the judgment of entrepreneurs and short-circuit another important facility: pragmatism.
Knowing When to Let Go
According to the study, entrepreneurs often do not maximize utility and value when it comes to knowing when to drop a venture and pursue a better opportunity.
The researchers compared start-up and persistence decisions. The key factor was expectancy, or the "subjective probability that an outcome will indeed follow behavior." In other words, entrepreneurs make a judgment that a certain course of action will provide an expected result.
The researchers looked at high-tech entrepreneurs, largely because of the "importance of ideas" in the industry and the premium placed on being able to evaluate the prospect of an idea and then to develop it. out of 422 potential subjects randomly chosen from a Department of Commerce list of businesses, 135 completed the survey.
Each entrepreneur rated the "likelihood that they would pursue a series of hypothetical entrepreneurial opportunities." There were different values of financial return, likelihood of obtaining the financial return, value of non-financial benefits, and likelihood of obtaining the non-financial benefits.
The Sunk-Costs Fallacy
The researchers found that when the entrepreneurs had an opportunity to gain higher value, they still resisted leaving their current businesses. According to a quote from a press release, one of the researchers--Bobby Garrett, Jr., an assistant professor of entrepreneurship at Oregon State University--observed that it was an issue of the existing investment in the current venture:
"It's escalation of commitment," Garrett said. "When an entrepreneur has invested resources into a new business, they have difficulty letting go even when things go south or another opportunity arises."
Another way of phrasing this is the classic "sunk costs" fallacy in decision making. Because people have put resources into a decision, they resist abandoning that choice because they would lose that investment.
However, the investment is already gone. Unless conditions change drastically, further investment may also yield nothing in return.
For entrepreneurs, the difficulty is knowing when they have sunk costs and are too emotional about a business decision, and when the payoff for the current line of business is realistic. Many businesses take time to nurture and develop. If you leave too early, you could end up wasting the effort and money put into a new company.
The lesson to take away is to struggle with the automatic inclination to stick to an idea and evaluate if it really has merit and hope. In the worst case, then you can more quickly cut your losses and move on to something more profitable.
Or, as psychologist Heidi Grant Halvorson smartly put it on TheAtlantic.com: "When we see our goals in terms of what we can gain, rather than what we might lose, we are more likely to see a doomed endeavor for what it is."
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.