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Exit Strategy Pitfalls

Exit strategy’ is used to describe a complex transition plan across a broad array of circumstances, including a change of ownership through the sale of a business; an upcoming CEO transition; the gradual reverting to traditional monetary policies following the implementation of unconventional ones; the termination of an aid program in a developing country; the withdrawal of a military presence from a foreign country at war; and the ending of lockdown policies as a pandemic risk falls under control.

Exit strategies tend to be implemented too late and are too often botched: Shareholders sell non-core assets when they are way past their performance peak, NGOs tend to settle in a developing country they came to support for a definite period of time only, central banks get addicted to unconventional policies, and governments involved in wars abroad struggle to bring their troops back home. The same risk naturally applies to the COVID-19 exit strategies.

A number of reasons contribute to these suboptimal outcomes, starting with the ‘status quo bias’. It is proven that individuals are more likely to accept the current situation than change, especially when faced with difficult choices. This is supplemented by the ‘confirmation bias’ according to which decision-makers seek or interpret evidence in a way that supports their preferences when soliciting the views of experts, including military officers, investment bankers, economists or, perhaps more dangerously as in the case of COVID-19, presumed rational, selfless and apolitical scientists.

The ‘sunk cost fallacy’ becomes apparent when decision-makers struggle to call quits on an inadequate course of action as they reflect upon the amount of resources painfully invested in it. This is illustrated in the case of COVID-19 by Boris Johnson’s declaration in his speech earlier this week: ‘I refuse to throw away all the effort and the sacrifice of the British people [through a premature lift of the lockdown].’ The vicious circle lies in plain sight: the longer the lockdown, the longer it is set to be extended, etc.

Adding to these psychological traps, the ‘zero-risk bias’ suggests that decision-makers tend to be more focused on bringing a low risk event closer to a zero percent probability than on reducing a higher risk event by the same probability. By eliminating one risk almost entirely, the amount of cognitive strain is indeed significantly reduced, making such decision more appealing. In the case of the Coronavirus, all eyes seem to be on further reducing the already compressed health risk whilst the growing economic risks are getting comparatively less attention.

It is worth reflecting upon one additional aspect, especially when considering the current times. Individuals and groups can become caught in their own narrative as in the case of groupthink. In extreme cases, it may take the form of mass hysteria in which ‘community-wide fear is said to overwhelm logic and individual thinking and ends up justifying its own existence’. The modern classic theater play ‘The Crucible‘ (1953) vividly tells a story based on this phenomenon famously observed in Salem, Massachusetts, in 1692. There and then, a whole village convinced itself that it was besieged by evil and went on a witch hunt. One of the characters explains: ‘It was only sport in the beginning, Sir, but then the whole world cried spirits, spirits!’. These group dynamics naturally stands in the way of rational decision making, including when it comes to exit strategies.

To avoid these pitfalls, a number of measures can be taken. First and foremost, some reasonable milestones towards a clear, transparent goal or ‘end state’ in military parlance must be defined from the early stage of an endeavor – if not beforehand – with a view to supporting an objective assessment of the progress towards success and the ultimate exit. Next, a vigorous debate must be fostered so that all points of view be heard when dealing with any subjective elements. Finally, leaders must lead. Each nation has been subject to different dynamics in these respects.

Human behavior and history suggest that the implementation of COVID-19 exit strategies across countries is inherently bound to be tentative and slower than it needs to be, which deeply concerns me when considering the disastrous state of many economic sectors, the growing unemployment rates and the mounting government debt levels. Only the future will tell whether elements of groupthink contributed to a delayed lift of the lockdown policies and thus to one of the biggest economic crisis of all time.

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