Escalation of commitment entrepreneurs: the real trap.
The escalation of commitment entrepreneurs fall into is not a lack of information. Founders spot the signs, but bias makes them put more into a plan already failing. So the fix is a number you decide while calm and obey when you are not.
The signs are not secret.
You might assume businesses die because owners miss the warning signs. They don't, however. The early warning signs business failure studies point to are easy to check, like a debt-to-equity ratio above one point four. A current ratio below one is another. Also, reporting that arrives later is itself a signal. Over ten per cent of revenue from one buyer is a flag, though that is lending practice, not research.
The bias behind escalation of commitment entrepreneurs face.
The literature calls escalation of commitment one of the most influential decision-making biases in entrepreneurs. It makes people put more resources into a plan that is already failing. Persevering sometimes leads to success, but often to chronic under-performance or bankruptcy. Underneath sits the sunk cost fallacy, so walking away feels like losing everything.
Pride, face and the second bid.
Four drivers explain why founders ignore warning signs: overconfidence, a reluctance to lose face, fear of admitting failure, and pride. Not one of them is a lack of information. The author spotted his own signs on that lot. Then he went and bid on another job.
So the founder in month one is reasonable, while the founder in the bad month is the least reliable judge. You are going to be both of them.
Guard against the escalation of commitment entrepreneurs face.
Read the four drivers and write down which one is most likely yours.
Write your act and stop readings tonight, while you are calm, and keep them visible.
From the book.
Because of escalation of commitment, which the literature calls one of the most influential decision-making biases in entrepreneurs, and which does exactly what its name says: it makes people put more resources into a plan that is already failing. Persevering with an unsuccessful course of action, as one paper puts it, sometimes leads to eventual success and often leads to chronic under-performance or bankruptcy.
I Want to Start a Business but I Don't Have Money, chapter 11: How many days you have left
Questions about escalation of commitment entrepreneurs.
What does escalation of commitment entrepreneurs face actually mean?
It is a bias that makes people put more resources into a failing plan. As a result, it often leads to chronic under-performance or bankruptcy.
Are the early warning signs hard to find?
No. Thresholds like a current ratio below one are easy to check, so information is rarely the problem.
What arrangement does the author say works?
You decide the number while calm and obey it when you are not. That is why you write two readings early.
Read the whole chapter.
This lesson covers one section of chapter 11, “How many days you have left”. The book goes further, with the full evidence, the stories and every exercise.
Lessons in this chapter.
- 01 Negative cash conversion cycle: why my company died.
- 02 Cash buffer days: what most small firms really hold.
- 03 How to calculate cash runway: one division a month.
- 04 Escalation of commitment entrepreneurs: the real trap.
- 05 What costs to cut first in a business: a default order.
- 06 Does cost cutting hurt a business: the honest answer.
- 07 Bootstrapped company survived pandemic: two brothers.
- 08 Monthly cash check for small business: the one habit.