The Theory Of Maximum Negative Threshold
This theory was something I discovered about 18 months ago.
I had just lost an enormous amount of money from a project that hadn’t worked out… and… I was trying to understand how I had allowed myself to lose so much money.
Because I didn’t lose it all in one day, in fact I lost a lot of money every day, for about 2 straight months. And by the time I eventually stopped the cash bleed, I was down, down BIG TIME. I just couldn’t understand how I had KNOWINGLY watched the money leave my bank account.
(I was fine by the way, I didn’t go bankrupt or anything like that, but I had to live fairly frugally for about 8 months until I rebuilt the bankroll I had lost).
It wasn’t until one afternoon when I was reading a book about the theory of Poker, that I began to understand what had happened to my decision making.
The guy who wrote the book was Mike Caro - a very successful gambler whose most famous work is called “Caros Book Of Poker Tells” - however, I think Caro’s most interesting work is his study of risk psychology.
One of the working theories that Mike Caro developed was the Theory of Maximum Negative Threshold (may not be his exact words but close enough). The theory is that a person has a Maximum Negative emotional threshold, and once that person passes the threshold, more negative experiences cannot make that person feel any worse. They are literally “Maxed out”… HOWEVER… that does not mean things cannot get any worse for them. It simply means they won’t FEEL any worse when more bad stuff happens.
A person affected by maximum negative threshold will stop trying to avoid further losses, because those losses do not bring them more pain than they are already in.
Business people who go through a nasty divorce and end up selling their business for $1 are a good example of people affected by maximum negative threshold. They compound a bad emotional experience by making decisions based on the feeling that life can’t get any worse. But it can.
Part of the challenge of being a good entrepreneur is learning how to deal with maximum negative threshold - because you WILL come into contact with it at some point. In those times, you will feel like what you do does not matter, but you must act like it DOES MATTER. There is a big difference between losing $1,000/day and $1,500/day even if it doesn’t feel like it at the time. You must figure out how to lose least, even when that still means losing a lot.
These days I am always aware of negative threshold, and when I feel myself crossing over it, I take a moment to remind myself that my decisions DO still matter, and do my best to make the correct decision no matter what the circumstance I face.
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