Welcome back, everybody, to the Greg McKeown Podcast. This is part 5 of our series on leverage. In our last episode, we discussed the power of one-time decisions and how they can yield results tenfold. Today, we’ll delve into a vital caveat in our journey to leverage, and that is the concept of negative leverage.
By the end of this episode, you will be able to notice, identify, and then eliminate those things that are disproportionately taking you away from the things that are essential to you. Let’s get to it.
If You haven’t checked out the Essentialism Academy recently, this is the perfect time to go and check it out. Go to essentialism.com. You’ll see the classes that have been curated specifically for you to be able to help you to design a life that really matters and to be able to keep coming back like it’s a disciplined pursuit of the things that are essential and to eliminate the things that are not and to make it as effortless as possible to make that transition.
Let’s start with a personal story. I once signed up for an online service, thinking it was just $10 a month. Well, it was $10 at that time, but imagine my surprise when they shifted the price to a hundred dollars a month every month that was just on automatic renewal, and I hadn’t noticed, so this had gone on for many months. This is a simple but classic example of automation in this case, working against us. But when nonessential activities are automated, they can silently drain our resources. From what’s essential without us even realizing it.
So what would you do in this case? You would just consider your subscriptions. They’re easy to start but often challenging to stop, and this passive continuation is a form of our subject today, negative leverage. You’re leveraging your resources in a way that diminishes rather than enhances your life. That’s the simple idea of it. Now, why are we taking a deep dive into this?
Well, one reason is because I got an email from Rob Mangreli. He’s been listening to this podcast for a while now, and he’s been listening to this entire series on leverage. He said this got me thinking as to whether there are scenarios outside of finance where using leverage can be a negative. Where using something intended to make things easier can actually backfire. He he adds that he couldn’t immediately think of non-financial examples of this of where using leverage can go terribly wrong, but he wanted to ask whether this was a topic that I thought might work in this 10X series. And, of course, the answer is self-evident. It’s here, and we’re talking about it today.
He shared, which I think is helpful, and we’ll put in the show notes a memo written by Howard Marks. This memo was written about the volatility of the real estate market in the Great Recession and the ways that banks leveraged bad assets at such a high level that it left the entire financial system unstable. And his concluding statement about it is helpful, both for that instance but also for every other form of leverage that I can think of.
He writes, “Leverage doesn’t add value or make an investment better. Like everything else in the investment world, other than pure skill, leverage is a two-edged sword. In fact, probably the ultimate two-edged sword. It helps when you’re right and hurts when you’re wrong.”
Well there it is that is the very heart of the matter. Indeed, it’s something that I wrote about in Effortless on Page 183. I wrote that one caveat is important to make and that is that leverage can work that automation or any form of leverage can work for you or against you. If nonessential activities are automated, they, too, continue to happen without you thinking about it.
I’ve already listed the specific idea of the subscription. But what other forms of negative leverage exist? Of course, here’s another example. There are dangers of negative leverage in all human resources. So it can certainly manifest itself in relationships and teams, particularly when we hire the wrong person. If we hire a low-trust individual, that can be the gift that keeps on giving in the worst way. So getting the decision wrong is clearly not ideal. But what really pushes the dagger in is not admitting it. It’s just pretending the problem will go away. Now I don’t mean that you shouldn’t take time to work with individuals. I certainly don’t mean that you’re not supposed to communicate and be precise if there are expectations that you have that aren’t being met, and to be able to do that in a way that is encouraging and affirming. Of course, I don’t mean that the first time someone does anything that is not what you want that we have to throw them out. But if you’re addressing the issue over time and you find that it’s really just not getting any better.
For example, if you have somebody on your team that is making life for everybody really difficult. If you’re the manager, if you’re the person with the decision rights on who’s on the team, and you don’t address it, you are sending waves of pain into the culture of that team. So If you have a team member who’s consistently under-delivering or causing conflict, this affects not only the immediate tasks but also the team’s morale and productivity in the long run. It’s its negative leverage in action. Where one wrong decision multiplies its adverse effects over time.
It may cost you something to address that problem today. It may cost you something to, at the right time and juncture, remove that person from the team, but it costs you not to do something.
Here’s another example. There are the perils of misguided Investments. So another form of negative leverage is throwing good money after bad. It’s easy to keep investing in a failing project due to the sunk cost fallacy hoping it will turn around.
A sunk cost bias is the tendency to continue to invest time, money, or energy into something we know is a losing proposition simply because we have already incurred or sunk a cost that cannot be recouped. But, of course, this can easily become a vicious cycle. The more we invest, the more determined we become to see it through and see our investment pay off. The more we invest in something, the harder it is to let go.
The sunk costs for developing and building the Concord airplane were around a billion dollars, yet the more money the British and French governments poured into it, the harder it was to walk away.
And all of us are equally vulnerable to sunk cost bias. It explains, I suppose, why we’ll continue to sit through a terrible movie because we’ve already paid the price of a ticket. It explains why we continue to pour money into a home renovation that never seems near completion. It explains why we’ll continue to wait for a bus or subway train that never comes instead of hailing a cab. And it explains why we invest in toxic relationships even when our efforts only make things worse.
I share an example that I came across when I was writing Essentialism. It’s the story of Henry Gribom, who, according to the article, spent his entire life savings, $2,600, at a carnival game trying to win an Xbox Connect. The more he spent, the more determined he became to win. Henry said, “You just get caught up in the whole ‘I’ve got to win my money back.’”
But it didn’t turn out that way. The more he invested in trying to win this non-essential item, the harder it was for him to walk away.
Have you ever continued to invest time or effort in a nonessential project instead of cutting your losses? Have you ever continued to pour money into an investment that wasn’t panning out instead of walking away? Have you ever kept plodding down a dead end because you could not admit that you shouldn’t have pursued this direction in the first place? Have you ever been stuck in a cycle of throwing good money after bad?
Well, it’s just those kinds of traps. Or if you consider a marketing campaign that isn’t yielding results, continuing to fund it, hoping for a turnaround, can drain resources and distract from more fruitful opportunities.
All right? A whole other example here. The missteps in learning and teaching. Negative leverage also appears in our learning and teaching processes. Learning something incorrect and holding onto that belief can steer us down the wrong path for years. And similarly, teaching others those wrong ideas amplifies this negative leverage spreading inaccuracy. So think about a business strategy based on outdated or false premises. If this strategy is adopted and taught to new team members, it creates a cycle of inefficiency and error.
Another example would be delegating the unnecessary. Delegating tasks that should not be done at all is a subtle yet pervasive form of negative leverage. You’ve potentially put the right people in the right place. You’re delegating. That’s supposed to be a form of leverage. Maybe you’re even extending a high-trust agreement with a high-trust person. But because you’re delegating the wrong tasks to them. And especially if you write that into an agreement so that they’re empowered to continue down that path for a long time, you have multiplied this nonessential activity that may continue effortlessly when you’re not paying any attention. And the person is doing what you’ve asked them to do, and they might even be doing it efficiently doing it well, but that’s the old Peter Drucker statement, “There is nothing so useless as doing efficiently something that should not have been done at all.”
Yes, but what if you’re delegating that? Think of how that could be a 10X form of negative leverage. There is nothing so useless as empowering other people to efficiently do things that should not be done at all.
And, of course, there’s something in all of this to be said for combining forms of negative leverage, that is, you could delegate a project to a person to a team, a whole organization where you ask them to build processes for your entire team, the entire company and they work on this, and they add without really meaning to, many, many steps in the process. And so they have added an enormous amount of complexity, and now it’s hardwired into the technical system. The users of that system will not have the power, in most instances, to do anything about that system. They will just have to execute according to the process that has now been embedded in a technical form in an inefficient process. And that can live on in organizations for years and years.
Unintentionally filling our lives with these forms of negative leverage makes it so hard to live an essential life because all the nonessential things are now effortless. So if you do nothing, if you don’t think consciously today about any of those items, the nonessential would continue to happen.
So as we wrap up this series, I want to leave you with a final homework assignment. Initially, right at the beginning of this series, I asked you to look for leverage everywhere and anywhere, and now I urge you to identify negative leverage in your life. Look for negative leverage anywhere and everywhere because if you can find one, and you can identify it, and you can stop or eliminate just one form of negative leverage then that can be a 10X play. It can free you from a perpetual drain on your resources and energy, and as we all know, every time you invest in a nonessential, you are, by definition, underinvesting in something else that’s essential. You’re making a trade-off that you don’t want to make, and if you build it into leverage, that can be going on in many ways invisible, and I’m asking you to try to make it visible so you can do something about it.
What is one thing that stood out to you in today’s episode? What is one thing that you can do immediately today while you are still thinking about this conversation? And who is someone you can share this episode with now that the episode is over? Thank you, and I’ll see you next time.