Japan had a difficult decision to make after investing billions in the 2020 summer Olympics. It is like the decisions business leaders must make when projects fail to perform.
— By Vincent Pane
In late March 2020, two events took place. The 2020 Summer Olympics in Tokyo, Japan, were postponed until 2021. The second event was the death of Kenny Rogers. How are these two events related?
Kenny Rogers earned early fame singing the song "The Gambler," which is all about knowing when to quit a game to cut losses. This was the business decision Japan's government had to make due to the COVID-19 pandemic.
In business, knowing when to abandon or postpone a project in which there has been a heavy investment is one of the most difficult decisions organizational leaders must make.
Secret to Surviving
"You've got to know when to hold 'em, Know when to fold 'em, Know when to walk away, And know when to run," sang Rogers. He goes on to croon, "That the secret to survivin', Is knowin' what to throw away, And knowin' what to keep."
The Japanese government and the International Olympic Committee (IOC) must have been singing this song when they cancelled the biggest global sporting event held every two years.
Sports events make up a multi-trillion-dollar global industry, and the Olympics is the end goal of many athletes. Moving the summer Olympics was a difficult decision because it impacted Japan's economy, the global economy, and the athletes. It was a decision that also caused grief among sports enthusiasts who enjoy watching the events, and represents a lost opportunity to bring people together from around the world during a time when unity is lacking.
At the same time, postponing the Olympic Games was a reminder that some things will always be globalized without regard for trade deals.
Neither Heads nor Tails
There is a decision theory called “loss aversion.” Applying it to business, loss aversion refers to how people assess uncertainty. It is human, some scientists say neural based, to prefer losses to acquiring equivalent gains. A gambler would not accept a coin toss in which "Tails I pay you $20 and heads you pay me $30." The brain, it seems, responds differently to negative and positive. A gambler would accept "Tails I pay you $20 and heads you pay me $20."
Japan held on as long as possible, but incredible pressure was placed on Japan to postpone the sporting event – letters from global health organizations, countries backing out of the games, athletes refusing to attend, and on it went.
The big issue for Japan was that it takes years of project planning and implementation to host the Olympics and the Paralympics, and they want a return on the investment. The Board of Audit of Japan estimates said Japan could end up spending $26 billion on the games when the original estimate was $7.3 billion. The country built fantastic but expensive sports venues that include a national stadium, smaller sports arenas, an athletes' village, and outdoor facilities.
Japan held on until the end of March to make a decision about postponing the games. In fact, in February, numerous Japanese officials were saying they are not even considered cancelling or postponing the games, and there was no contingency plan. After COVID-19 began to cause health and economic devastation, and the pressure mounted, the world fell back on the loss aversion principle. In effect, Japan was willing to gamble its $26 billion investment on the health of attendees. The world said it was not a good bet, and Japan was forced to postpone the games for an entire year.
Bowing out Gracefully
It is never easy to back out of a business project in which there has been a heavy investment.
General Electric has been making difficult decisions like this in order to simplify the business structure after experiencing a financial crisis 10 years ago. The company has divested itself of many operating units it has invested billions in. The end goal is to save the company from bankruptcy, of course, but it will look very different when all is said and done. Loss aversion has led the company to say that some units, even profitable ones, will never give the company the returns it wants and needs.
Japan's experience is a reminder for business leaders that decisions based on loss aversion are better made sooner rather than later. The Olympic Games are big business, but if the athletes and attendees do not show up, there will be huge financial losses. If they do show up, there will be huge human losses due to sickness. The ripple effect now is worse than it had to be if the decision had been made several months ago when the virus began rapidly spreading. Small businesses in Japan had already invested in things like tour brochures and revenue-generating products.
Japan's biggest risk in postponing the Olympics is that the games will still not be able to go on in 2021 due to some unforeseen circumstances. A business has a higher risk – the project drags the company down financially to the point it cannot survive.
What can businesses, especially small and medium-sized companies, learn from Japan's experience? One is that there are some forces that cannot be ignored. They include natural disasters and a national emergency, of course. Beyond that there are reasons like technology changes that make a project obsolete; supply chain disruptions make it impossible to get materials; federal mandates change the rules to the point the project cannot comply; and costs are out of control and cannot be recouped in any manner.
The principle of loss aversion can lead to financial disasters for businesses. Business leaders hang on to projects they should scrap for many reasons, some quite personal.
The principle of loss aversion can lead to financial disasters for businesses. Business leaders hang on to projects they should scrap for many reasons, some quite personal. There is a fear of career damage if the project fails, so the business person gambles with company resources. Sometimes people lie to themselves by saying they can "turn this around." Sometimes a new product in development is not competitive, even before it hits the market, but millions more is invested in it anyway.
Better to Walk Away?
The sports industry is reeling from all the tournament and event cancellations, and postponing the 2020 summer Olympics represents the peak of disappointment.
The potential returns in the form of lack of attendance were too low to continue the gamble. The risks of spreading the virus was too high.
Business leaders are reminded that sometimes it is better to walk away from the project. There is always a need for a contingency plan.