You are listening to the cactus project with your host, Mel McDonald.

Hi, this is Melanie and we’re halfway through our podcast series already. I thought I’d make this midpoint episode a little different and rather than doing an interview, we could have a chat about some of the common themes in the interviews so far. What I find particularly intriguing is that there is a lot of science in these common themes.

So I thought I would share some of the stuff that I’ve learned about behavioral economics, particularly in other words, this is my layman’s explanation, how human’s behave around money and business decisions. And you’ll start to see, I think some of the patterns and the stories that we’ve been hearing.

It’s not uncommon at all. To hear somebody say something like I was determined not to give up or I’d put so much effort into it already. I couldn’t stop at that point. Or even that you should make sure that you listen to people outside of your situation. But what I think is fascinating is that there is some pretty solid Nobel prize, winning science in some cases behind these concepts.

So I thought for anyone who has a little bit geeky like me, you might find that really interesting. And in some ways, A little bit reassuring to find that you are not actually doing something stupid. You’re doing something perfectly rational based on our, how our brains work. We think our problems are unique and we think we are pre completely unique.

Why do ? And if we didn’t think that we would never embark on this entrepreneurial journey in the first place. But interestingly, and you might be sad to hear this. We are not unique at all. In fact, we are entirely predictable, so let’s just look at a handful of points. This will be a shorter episode than the others, but there are a few things that I thought were worth discussing, especially since we are now halfway through the season.

I’m gonna give it my best attempt to explain some behavioral economics theories in civilian terms. And I’ll probably make a few behavioral economists cry during the process. Um, of course I’m not an economist, I’m not a psychologist I am, or I used to be a chemist. And I think this stuff is really fascinating though, because behavioral economics, it’s basically about how the population deals with money, which is at the root of a lot of this stuff that we’ve been talking about.

I’ve become pretty intrigued by this field in recent years. Now, how it started was when the resort that I had bought failed and took a lot of my assets with it. I went looking for answers. I went looking for books, research, documentaries, anything really that could explain what I had done, where I’d messed up.

And probably most importantly at the time, like explain how I was feeling and how I could get past the awful feeling. And what I found to my surprise is that there seemed to be very little actual research. So anything I could find fell into one of two categories, it was either books about big companies which had failed, like how the mighty fall by Jim Collins and some of those classics, or it was more aimed at the sort of venture capital funded startup culture and about how important it’s to fail fast and fail often before you succeed, which is actually quite a different scenario from putting your life’s work and assets into something.

And then having it fall over. The only research I could find anywhere was a PhD thesis by somebody at a university in Sweden, where she had done quantitative research on a thousand or so small businesses, which had failed. And she’d interviewed the people afterwards to see what had happened to them. So I decided to track her down and ask her some questions.

As I mentioned in the trailer for this series, it turned out she was living and working at the university of Queensland here in Brisbane, Australia, about 10 minutes up the road from me. So I am very grateful to Dr. Anna Jenkins for giving me a printed copy of all of her PhD work. And I’m even more grateful to her for meeting with me again and going through all my post-it notes and highlighted questions.

After I had read the. Um, I do suspect there is not too many civilian weirdos who turn up at a university research’s office to quiz them about the contents of their PhD. I think she said her dad and I were probably the only people that had read it. It was really good. So let me talk about a handful of these behavioral economics theories and how they apply to what we’ve been hearing about and what we’ve been doing.

Okay. First one you may have heard of the sunk cost fallacy and the official definition is individuals commit to the sunk cost fallacy when they continue a behavior or endeavor as a result of previously invested resources, time, money, or effort. So what that means in English is that the more effort that we have already put into something, the, how it is for us to stop, they also talk about it as being a bias from an ongoing commitment.

It’s kind of back to friend, isn’t it? Because we. I have put so much into this. Now I can’t pull out. I have to keep going. And to me, that ties up sometimes with when your kind of identity is caught up in your business. And we’re saying that at the moment with stuff that’s going on in the world, people can have very strongly held beliefs, which may be inaccurate beliefs, but the more strongly they’ve held them and the longer they’ve held them.

The harder it is to, to step away from that. So in a business context, it can be I’ve mortgaged my house to keep this business going. I’ve already spent half of the value of my house on this or five years of my life or whatever else it might be. I can’t stop. Now. I have to keep going to make this work.

The reason they call it a sunk cost fallacy. Is that the fact that you have already lost a lot to keep something, going to keep a business going should not in any way, have an impact on whether you decide to continue from there on, because losing a lot is not a predictor of future success. Um, I remember many years ago I got a company into what was then the, the B I w fast 100.

It was the fastest growing hundred companies in Australia. I was talking to the editor of the magazine and, you know, saying how about that whole, you know, you eat baked beans for a while, while you get your business going, and then you become really successful. And he said, well, not necessarily. He said for every, you know, five people that have, um, eaten baked beans and made their business successful, there’s another 95 people who’ve eaten baked beans and never made their business successful.

So do not assume that just because we have suffered through, so. That the only thing to do is keep going the next one. And I love this one and this one actually got a Nobel prize is a thing called prospect theory. I don’t know if you’ve heard of that, but prospect theory is based around how people decide whether to proceed based on whether they’ve been making gains or losses and Daniel Canman who got the Nobel prize for it looked at how people behave in a casino and it was something like, I’ll probably get this wrong, apologize to the.

Again, but, um, you go to the casino with a hundred dollars. You win, you gamble and you win a hundred dollars and you go, awesome. I’ve got $200. Let’s go out for dinner. You go to a casino with a hundred dollars and you lose. Then people go, let me just get another hundred dollars out of the machine so I can win my first a hundred back.

Then you’re down 200. And so it’s that doubling down on your losses. And so it’s a, it’s a strange and kind of illogical thing that what we do is we tend to cut our wins and let our losses run, which is of course the exact opposite of what we really should be doing. But we, again, it’s related to nurse similar to the sun cost thing.

We go, I can’t afford to go home when a minus $400, I’m gonna have to gamble again. And. They originally discovered it in casinos and people would just keep on gambling and gambling and gambling until they’d run outta money. Now it’s really easy for us to hear that and go, oh, idiots, you know, what a stupid thing to do.

But in fact, we often do the same kind of thing with our businesses. We, we do stuff that succeeds and we go, okay, that’s great. I’ll, I’ll take that money off the table. I’ll stop doing that. Now. Now I’ll go and do something else that I find more interesting or I’ll try something new or whatever. We try stuff that’s not working.

And we tend to pull good money after bad in the process of trying to make it work. Sound familiar. If you wanna know more about prospect theory, go and read, um, the book called thinking fast and slow by Daniel. Canman the guy that got Nobel prize and he will explain it a lot better than me. I’m sure. Okay.

Third one, another behavioral economics theory. It’s a thing that they call action bias, which I think most entrepreneurs will probably know as chasing bright, shiny objects or having entrepreneurial seizures. One of the things that I learned after a few years in business is that one of the smartest things that I ever did was got myself a second notebook titled at ideas for later and all the brainwaves that I had.

For things that I could be doing that were completely different from what I was working on right now could go in the ideas for later book. So we tend to do that don’t we were in business and I think there was in Shane and Ann’s interview. They were talking about how, when things were going bad, they weren’t looking for lots and lots of new projects and trying different things.

What it is a science behind. It says that what gives us a sense of control is if we are doing lots of stuff. So when things are going bad, we go, the more action I’m gonna take. The more chance I’ve got of fixing this. But again, there’s no correlation between a lot of action and turning a failure into a success.

Um, one of the examples in some of the reading was talking about medical treatment. So, you know, if you’ve got, um, a serious illness, a lot of people will opt for a treatment, even if there’s no evidence that it works rather than not taking a treatment, because we feel reassured, we feel like we’ve got more control.

When we actually take action about it. So it also is influenced by peer pressure. Like people, we want to look like we’re doing something. We want people to see that we’re doing something, even though we may be better off just to stay right where we are. Um, the other really good non-business example. I read of that, that said that there’s some statistics that say for a goalkeeper in soccer, if you ever watched soccer game balls being kicked at the.

They’ll always, you know, jump either to the left or to the right when there’s a penalty kick. But statistically, if they just stayed in the middle of the goal, they’ve actually got more chance of stopping the ball. But imagine how the fans would be if the goalkeeper just stood there in the middle and didn’t dive in any duration.

The other thing about action bias is they call it is that it does tend to be related to confidence. So the more you think you should know what you’re doing, the more likely you are to race around taking lots and lots of actions to try and solve the problem. I’ll just explain a couple more of these ideas and then we might wrap it up today and I that’s quite a short episode.

So the next one is a thing that they call ambiguity aversion. That was such good titles for such kind of simple things. Ambiguity aversion is that we will always favor unknown over an unknown. So if you are in business in trouble and you go, my options are continue to trade. Even though I’m digging deeper into a hole or shut down the business and face an unknown future, 99% of people will con will favor the known.

They’ll just continue to trade as just how our brains work. We’re set up to be more confident, sticking to what we know than taking the risk of the unknown. Even when the risk of the known is actually potentially much, much bigger than the unknown, if that makes sense. So if there’s, you know, if there’s two bets, one that we know the odds, one that we don’t, then we’ll take the one where we know the odds, even though the odds might be terrible and we do it over and over and over in business, where we go, these are the customers that I’m used to dealing with.

I’m gonna go and get more of them rather than risk changing tax. Some. And actually stepping out into the unknown for something that might actually be much lower risk than what we’re doing right now. But Tina’s one was a good example of that. I thought we, in her interview where the, the lawyer said to her, you have to close the business or you might go to jail.

And so she took that certainty of them saying, this is what’s gonna happen. Rather than taking the risk of the unknown of what would happen if she continued to trade. Now, this last one is probably my second favorite, probably because again, it’s one that I absolutely can see that I did myself. And there’s a thing called the endowment effect bias where it’s basically that we overvalue what we already have.

Um, somebody explained it to me really well, many years ago in a different contest when I was doing a lot of property investing and I could never decide whether I. Sell this property that I’d had for a few years or not. And he said, if someone came in on today and offered for you to buy this property at the price that you could get for it, when you sell it, would you buy it?

And I’d be like, oh no, I wouldn’t pay that for it now. And I say, okay, well then why are you holding it for that? But we tend to have a bias towards what we already own and it makes it quite hard. And I’m speaking from personal experience here as. To liquidate our assets, even when liquidating them in a controlled manner might be a lot better for us in the long run than trying to hang onto them because we apply so much value to stuff that we already own.

And that’s all sorts of reasons. Isn’t it? It’s because that can have like emotional attachments. It’s because we have got history with that. It comes back to what we were talking about before, about the known versus the unknown. But most of the theory around why we do that is about the psychology of loss, aversion, and being afraid of loss.

I think the interview that we’ve had, that probably is the best example of somebody who handled that extremely well. Would’ve been Rachel, when she talked about selling down her properties. Most people I know that are in the situation that she’s in, would’ve done anything to try and hold onto these properties because their ego, their identity, their endowment effect of this is my properties.

And I have to keep them all of those things would’ve stopped them. And so I think that the, the, the strength to actually say. I can actually let these things go, cuz in the long run I’m gonna be better off is, is quite remarkable and quite unusual. So that’s, I think that’s about it for me today. Five quick theories of behavioral economics who needs to spend a whole lifetime studying this stuff when you can do it in 20 minutes.

Um, anyway. I hope you found that. Interesting. Um, let me know if you did or even if you didn’t, I guess. Um, and, but if you did find it interesting, I’ll explain a few more of the behavioral economics theories. In the final episode, I find it fascinating, but then I did spend half my childhood in the library.

So normal people might not find it quite as fascinating, but I think the thing that I, I got from it the most, when I started reading about this stuff was the realization that. The stuff that we think is a character flaw and we beat ourself up for, because we’re like, why did I do that? That was so dumb.

You know, hindsight is a wonderful thing, isn’t it? And you go, why didn’t I sell those properties? Why did I throw good money after bad? Why did I run around like a maniac trying to do 27 different things? It’s because we are human beings and all human beings pretty much, except for the odd unique one.

Like Rachel behave like that in that situation. And I don’t know about you, but for me, I found it somewhat reassuring to realize that, okay, disappointed that I wasn’t unique, but reassured that I wasn’t unique and, and everybody who’s been through a business failure has pretty much been through one of these kind of process.

So I will leave it there. Lovely to chat next week, we’ll be back with the next batch, the following next five episodes, um, of interviews. And then we have got one more summary one, and we’ll be wrapping up the season. I can’t believe we are halfway through already hope you’re finding it useful hope you’ve got some good nuggets.

I think we’ve had some great interviews so far. We’ve got some very interesting ones coming up with a few people around the world, doing some pretty remarkable things with. Pretty remarkable histories as well. So I’ll talk to you again next week. Thank you. This episode of the cactus project is sponsored by global training Institute.

Australia’s leading online training college. It was presented and written by Mel McDonald produced, edited, and visually designed by Maggie. Has we hope you found this interview interesting for more inspiring stories from people whose businesses went wrong and how they recovered all went to cactus. As we’re saying Australia, please subscribe to the cactus project on your favorite.

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