The following is a question posed by Daniel Kahneman in his book “Thinking, Fast and Slow”:
You are offered a gamble on the toss of a coin.
If the coin shows tails, you lose $100.
If the coin shows heads, you win $150.
Is this gamble attractive? Would you take it?
He goes on: “For most people, the fear of losing $100 is more intense than the hope of gaining $150. … Losses loom larger than gains and … people are loss averse.”
I thought of Kahneman, winner of the Nobel Prize in economics, during a recent conversation with a CEO client. The CEO was asking himself incredulously, “How could I not have fired that Executive Leadership Team (ELT) member six months ago? She did enormous damage. I thought I had already learned this lesson.”
This CEO is not alone and I believe Kahneman’s findings about loss aversion are at least partially at the heart of the problem. The risks involved in terminating an ELT member are obvious. To name just a few:
- Your board may be unhappy.
- It may send a worrisome message to external stakeholders.
- It creates uncertainty and fear among the rest of the ELT as well as the terminated employee’s direct reports.
- You need to have a tough conversation with the person being terminated.
- You may have to pay a severance.
- You may not find a replacement that is any better.
What is harder to see and weigh are the potential upsides:
- A great performer could make significant contributions in the role.
- Team meetings could be more productive and happier.
- You would be eliminating one-on-one meetings with the poor performer that inevitably leave you feeling frustrated and wondering what you are doing wrong.
- It will allow you to take a fresh look at the terminated team member’s team and possible talent upgrades.
- You will gain respect by taking care of the issue (you can be sure that other team members are wondering how you could possibly let the issues go on).
- Ultimately, you will get better results.
Kahneman’s research suggests that most people “weigh losses about twice as much as gains, which is normal.” With this in mind, the answer to my lamenting CEO becomes more obvious: He is suffering from normal risk aversion. It takes effort and energy to overcome normal loss aversion and the easier path is maintaining the status quo, even if it is unpleasant.
Next time you find yourself saying, “I know this person needs to leave, but I can’t do it now because (fill in your own reason here),” I suggest you challenge your normal loss aversion and consider acting. I have yet to have a client say to me, “I sure wish I hadn’t let Joe go.” On the contrary, they always say, “I should have done it sooner.”