McKinsey's new 'Exit Matrix'

Standard economic theory treats human beings as rational, calculating
machines, but behavioral economics holds that the machine often breaks
down. Businesspeople, no less than others, are subject to cognitive
biases that can undermine their objectivity—particularly in potentially
career-destroying decisions to exit foundering businesses or cancel
struggling projects.”—“When to exit a failing venture,” August 2007 edition, “The McKinsey Quarterly”:http://www.mckinsey.com/ideas/mck_quarterly/?cm_re=Dotcom-McKQuarterly-Top%20Nav

Are founders ‘rational, calculating machines’? Can we make the decision to leave our startups in a clear-headed, dispassionate, way? Researchers at “McKinsey & Company”:http://www.mckinsey.com/ think so, and they’ve offered a new tool to help us do it. This month, the consulting firm has published “a chart”:http://www.mckinseyquarterly.com/newsletters/chartfocus/2007_08.htm that attempts to make it easier for us to get over the psychological barriers that prevent us from leaving ailing businesses when we should. The matrix is not overly complex (unusual for consulting material!). We suggest you print it out and pin it to your wall.

Perhaps the most helpful tip is in column 3. There McKinsey calls-out simple definitions of the particularly thorny biases that get us into the most trouble, like:

confirmation bias = seeking out information which supports [your position] and discounting that which does not
sunk cost fallacy = factoring in unrecoverable costs already incurred when making your decision
(and my favorite) escallation of committment = investing additional resources even when all indicators point to failure…

The report is making the rounds, but in case you haven’t seen it, or miss the guest-pass window, you can register for free “here”:https://www.mckinseyquarterly.com:443/register.aspx?act=recookie to get access to it. Also review a related November 2006 article linked at bottom of the chart entitled: “Learning to let go: Making better exit decisions.”

We strongly encourage you to sign-up for the McKinsey Quarterly, as it’s full of all kinds of useful stuff. Like this piece, on “why you shouldn’t hire jerks”:http://www.mckinseyquarterly.com/PDFDownload.aspx?L2=18&L3=0&ar=1963, and how to identify them. Another pin-up!

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