Avoid going “on tilt,” and it will be ok.
It was a card room in downtown Stockholm, Sweden.
I did a bad thing–playing poker with only a finite amount of time available. I had a little time on my hands and wanted to play some hands, so I was “loose,” as they call it, firing out bets at a healthy clip just for a little entertainment. It’s a good way to lose money, but it can also be fun. Except then I suffered a bad beat–I think it was betting hard into a full house with a modest pair in my hand in a mid-level limit hold’em game.
I stayed with it and was crushed by a guy with a higher pair, and then I did something that is all too common. I took the aggravation of that hand and bet hard into the next hand with it; I had nothing in my hole cards, but I raised a couple times, and I was soundly blown out by the Swede sitting to my left. And under his breath, this guy who had spoken not a word of English for an hour or more said:
And despite wanting to jump up and take a swing at the guy, I took a second and realized he was right. I was “on tilt,” which is to say I was making stupid bets after losing a bad hand. Emotion got the best of me.
But you know what? The term applies in business as well: Managers and executives frequently go on tilt; they suffer a minor loss and then seek more risk to offset it.
We are not good at maintaining an even keel during times of rapid changes in risk; if we suffer a loss, we have a pernicious tendency to double down the next time around to make up the loss, and this leads to much stupid.
Case in point: a management team misses out on a highly strategic M&A transaction by bidding too low. They make a perfectly rational bid, but they lose. So the next time a deal comes along, the same management team goes on tilt, shading their bid not just to their economic disadvantage but often to the point of irrationality. They may win, but they suffer the winners’ curse: they pay a value that no rational actor, even one with a big strategic premium, would pay.
Another manager, in the midst of negotiating a deal, ignores rational advice that the deal is off the rails; he has to get a deal done, so he caves in to his counterpart’s demands after the counterpart walks away. He gets “played” in the negotiation because he perceives the walk-away not as a tactic but as a loss.
Another manager, on losing a highly talented potential new hire to a different offer, spends millions on upper-tier consulting support on the topic the new hire would have been expert on.
All of these are examples of being on tilt. The managers above have all made irrationality out of rationality.
How do you avoid it?
The first and best way is to avoid artificial constraints. In an uncertain world, constraints that have no bearing on value are dangerous. My artificial time limit at poker, the need to “make” quarterly or annual metrics, or the need to please management are all technically reasonable, but they don’t relate to value: You may get a deal done within the constraints, but chances are low that it will be a good deal.
Second is to seek advice.
Third is to understand your culture and the culture you are dealing with. How risk balanced are you? Rookies go on tilt far more often than pros, and so do insecure executives vs. seasoned ones.
Finally, know when irrationality is a possibility–and know what it costs. You, like me in my poker game above, may be able to absorb some losses due to taking a flyer here and there, but you also might not.
All this is to say that you are likely to encounter circumstances in which you, your manager, or the executive team whose board you sit on is on tilt. They may be irrational to the extreme due to losses or perceived losses they’ve suffered, and this is especially true when it comes to good governance. Management teams who have not made their numbers or moved the stock price in a while will have a tendency to up their risky behavior.
So watch out for examples of this type of behavior. Avoid going on tilt, and it will be ok.