Know When to Fold 'Em: The Dollar Auction

Picture twenty bright, success-driven business people in a seminar. The leader says: “I’m going to auction off $20 to the highest bidder. The wrinkle is that both of the two highest bidders will have to pay. While the highest bidder gets the $20, the second highest bidder gets nothing.”

In this exercise, described by Keith Murnighan in his book, Bargaining Games, the bidding usually starts low: 50 cents, a dollar, $1.50, etc. Bidding escalates up to about $15. Then people begin to drop out until only two bidders are left. Often, one of them bids $19.99, smugly thinking that he has frozen out the competitor.

A pregnant pause occurs as the other bidder contemplates what to do. To win, he must bid more than $20. Even if he wins, he loses. But, if he quits, he’s out the amount of his last bid, say $19.50. Perhaps more important, his competitive juices are flowing. If he quits, he’s out money and his ego investment. Ego firmly in charge, he bids $21. And they’re not done! Bidding continues, often going as high as $70 - for a $20 payoff! Logic is not at work here.

People face similar dilemmas every day. We see them in government, in personal lives, and in business. The Viet Nam war is a classic example from government. As American troops began to die and American prestige became increasingly on the line, our exit became more difficult and more costly.

Many failed marriages begin as so-so romances. One date leads to another. Friends and family get used to the two people being together. One small step leads to the next. The couple finds it easier to go with the momentum than to break things off. Before they know it, there is a wedding. Now the couple faces a life time of boredom, or a painful divorce, because they were unwilling to face the lesser pain of breaking things off earlier.

In business, there are many situations that demand that you know when to get out:

• You invest resources in the development of certain products and services. It may be hard to let one or more of them go, even in response to ongoing poor performance.

• An employee may not be a great fit. Once in place, making a change often involves emotional distress. How do you decide that it’s time to pay that price?

• You have a marketing strategy. If it is not paying off, when do you decide that you need a different approach versus staying the course?

• You have been calling on a promising new customer who keeps putting you off. When do you decide to quit so that you can invest time and energy in a customer who will buy?

• If you have partners, you may have invested time and energy in a partnership that is proving to be less than you hoped. Do you attempt to revitalize the partnership or end it?

How to Know What to Do: Reality testing is the skill we need to handle such situations well, i.e., the ability to see things for what they really are rather than allowing our emotions to cloud our perceptions.

None of us has perfect reality testing. (If you believe that you do, I’m afraid that you are experiencing an episode of poor reality testing.) When faced with difficult choices, three emotional factors can interfere with our seeing things accurately. First, no one wants to go through the pain of losing resources for no gain. It is our instinct to avoid pain. Suppose you have an underperforming vice president of sales in whom you have invested time, energy and training. It may be hard to accept that those efforts will never pay off. So you are tempted to hang on.

Second, we like to see ourselves as smart and as having strong judgment. If you hired this person and defended him to your board and others, before you can make a change, your ego will have to take its lumps.

Third, we must deal with the reactions of others. We may worry that others will lose faith in us if we admit mistakes.

How to Grow the Skill: First, be willing, emotionally, to lose sometimes. If you tell yourself that you cannot afford to lose your investment in the vice president of sales, your anxiety will be too high for clear thinking. If instead, you say to yourself: “I hope that we don’t have to let him go, but we will not fold if we do,” you will be able to think clearly. Moderate anxiety gets our attention. Excessive anxiety makes us stupid. When we have excessive anxiety, we are probably telling ourselves something that is irrational. Our brains send us irrational messages all the time. Only when we stop to hear them can we challenge irrational statements with reason.

Second, remember that every judgment that you make is not the ultimate test of your intelligence. When you face a difficult decision, and it seems overwhelming, you may be giving it too much meaning. Take a few minutes to make a list of your successes. When you remind yourself of all the times that you have made good choices, it will be easier on your ego to admit that, this time, you were wrong.

Third, it is true that people may lose faith in us if we make a mistake. However, we usually over-estimate that likelihood. It is more likely that they will lose faith in us when we stubbornly refuse to accept mistakes that have become obvious to them. People whose respect is worth having will know that no one ever ran a successful business without making mistakes.

Dana C. Ackley, Ph.D., is founder of EQ Leader, Inc., which offers executive coaching and helps companies perform at their peak. He can be reached at (540) 774-1927, or by e-mail at dana.ackley@eqleader.net.