Lee Davy talks about the psychological phenomenon known as the sunk-cost bias and how it can make the most rational and logical poker players do the most irrational and illogical things.
The best poker players are rational and logical thinkers of the highest order.
So, why do the players sitting comfortably on pearl-shell clouds find themselves losing large six figure sums via backing deals that stink of rotting flesh?
During a conversation with a professional poker player about this quirk of logic, the topic of conversation became about one of the most famous players in history. He still kicks golden ass today, and yet there was a time when he backed a mediocre player who ran up a huge six figure sum in make up.
He ended up in this position after suffering from a dynamic known in economics as sunk-cost bias. Sunk costs are costs that once spent are never going to be recovered, and the bias is an attachment to that cost even though it’s gone.
You suffer from sunk-cost bias.
I suffer from sunk-cost bias.
Here are a few recent examples.
I am a fan of the entrepreneur and author, Ryan Holiday. He goes through books like a crack addict goes through bulbous glass pipes. His recommendations are on point.
One of them was Meditations by Marcus Aurelius. Holiday said it was the most important book he had ever read. Some of the greatest entrepreneurs in the world of podcasting echoed his sentiments. And yet as I read this supposed great piece of work, nothing went in. The words slapped against my brick wall of a face and fell on the floor.
And yet I kept reading because I had paid for it.
I am sitting in a cafe rubbing a belly like Santa Claus. I ate too much food. Not because I wanted it, but because I paid for it.
The new X-Men movie is pants. And yet I stayed in my seat for 2hrs 30mins and later complained to my wife about wasting my life.
“Why didn’t you just leave?” she asked.
“I had paid money to watch it and was hoping it would improve,” I replied.
The sunk-cost bias is investing time and energy into anything that we believe is unlikely to succeed or will not drive value within our lives. It’s a psychological puzzle. We keep hoping things will turn around. We keep pumping time, energy, and money into that belief only to sink deeper into the quicksand.
Going back to the rational and logical thinking poker player and his six-figure hole – he was persisting with his wrong decision because of the irrational attachments to the costs that were pouring out of his bank account.
And he is not alone.
How can you ensure you don’t fall into the same trap?
1. Do Your Homework
There is a particular alchemy involved in poker. Mix luck with skill and you get one of the most fascinating and absorbing games in the world.
We all know a professional poker player who has been successful despite grasping the fundamentals of the game; creating a legacy based on the foundation of luck.
You need to separate the wheat from the chaff. You need to do your homework. Recognise great from average.
How do you do that?
Few poker players examine the games of their horse’s. Without thorough review one doesn’t know if the bad play or bad luck created losses? Why do very smart people allow ‘trust’ to be the whip? Do they even know if their horse is a great player? What if they do have a skilful acquisition and yet they are blowing stack after stack because their wife is blowing man after man?
You have to have a review process in place to measure performance. Then you need to have a feedback loop in place for a discussion on how to move forward. Without this, you are standing on a clifftop wearing white chinos, pissing in the wind
Players often end up owing significant figures in makeup because of a lack of boundaries.
People perceive a boundary to be a constraint. Boundaries streamline process and behaviours. It traps value. It doesn’t allow for crap to permeate the structure.
Backers need to be very clear on the boundaries within their professional relationship. There can be no ambiguity. There must be a clear clarification of process for every single transaction in the relationship.
How do you do that?
It’s time to turn pro.
If you have a horse with large six figures in makeup, then that’s a rookie mistake. You are not professional, which is interesting because one assumes there is a certain semblance of professionalism present in the first place for someone to have accrued enough money to donate six figures in make up (luck not withstanding).
Create a professional contract with your horse.
Carry out a risk assessment. Cover every eventuality you can think of, including when the relationship ends, payment plans, and review.
5. Grow a Set of Balls
There is a lot of ego in poker, and it’s one of the reasons players allow makeup numbers to get so big. They can’t find the courage to face up to their errors. They are not taking personal responsibility for the mistake. Grow a set of balls. Understand and accept that poor judgment played a role. The money is gone, and every banknote that follows will be devoured by the dragon.
6. Remember The Goal
Why did you enter this relationship?
Unless you are a charity, I assume you started backing because you thought it would be profitable
Think about that?
If you are running into absurd numbers because of the sunk-cost bias you are not making a profit, you are making a loss.
So how do you get out of this mess?
Get back to the original goal.
7. Learn to Let Go
Letting go of the money is terrible. Letting go of your relationship can be even tougher. We are back with ego again. People find it difficult to look someone in the eye and to tell them that it’s no longer working. Your attachment to relationships and the time invested in them can cripple you. But we all fall out of trees, get punched in the nose, and fall off our bike. Sunk-cost bias is no different. Take your knocks like a man. Think. process. Do the right thing. Learn. Move on.