The Stop Rule
A Stop Rule sets a condition for ending or revising a course of action in advance: for example, selling after a 10% investment loss or turning back from a climb at a set time. It can reduce repeated deliberation and help enforce a limit.
THE IDEA
In their excellent book Simple Rules, Kathleen Eisenhardt and Donald Sull argue that in certain situations, simple rules are more effective than complex ones because they shorten the amount of time needed to process information – one of the most time-consuming processes of all.
To give an example: How do I know when I should revise a decision? Give yourself a Stop Rule. A Stop Rule replaces repeated deliberation with a condition chosen in advance. Its usefulness depends on the situation and the quality of that condition. In 1935, the legendary investor Gerald Loeb formulated a simple but powerful Stop Rule for the eternal question asked by all investors: When should I sell? Loeb’s rule: if an investment loses 10 percent of its value, sell it! No questions asked.
The beauty of Stop Rules like these is that they are unconditional. They can reduce deliberation and, in dangerous settings, help control risk. Mountaineers use turnaround times to leave enough time for descent. For example: if we don’t reach the summit by 2 p.m., we turn around. The book cites missed turnaround times during the Mount Everest disaster in 1996, in which eight people died.
It is an art to recognize the boundaries between cowardice and madness. Reinhold Messner
Two variations of the Stop Rule: nonnegotiable limit (if we don’t reach the summit by 2 p.m., we turn around) and flexible limit (if my heart rate is still below 150 by 2 p.m., I will keep climbing until 3 p.m.). The heart-rate example illustrates a conditional rule; it is not an established criterion for safe climbing.
When to use it
Investing: Consider a 10% stop-loss as a precommitted sale threshold, accounting for the possibility of execution at a different price.
Mountaineering: Define a turnaround time to prevent pushing beyond safe limits.
Project management: Decide to kill a project if it fails to meet key milestones by a certain date.
Reading: Abandon a book after 50 pages if it hasn't engaged you (the 50-page rule).
FROM THEORY TO EVERYDAY LIFE
In practice
The 10% Stop-Loss in Investing
In 1935, investor Gerald Loeb formulated a simple Stop Rule for when to sell an investment: if it loses 10% of its value, sell it immediately with no further deliberation. The rule commits the investor to act at a chosen threshold. It cannot guarantee the sale price or prevent a larger loss if prices move abruptly.
Mountaineer's Turnaround Time
Mountaineers can choose a turnaround time to reserve time for descent: if they have not reached the summit by 2 p.m., they turn around. The book links missed turnaround times to the 1996 Everest disaster, in which eight people died. Observing a turnaround rule reduces one source of risk without ensuring a safe return.
A MOMENT TO REFLECT
Put it to work.
What Stop Rules could you set in your personal or professional life to avoid costly deliberation?
How might a flexible Stop Rule (e.g., based on heart rate) be more effective than a fixed one in certain contexts?
Think of a situation where a stopping rule might have helped. What condition could you have chosen beforehand, and what risks would have remained?
References
- Simple Rules — Kathleen Eisenhardt, Donald Sull (2015)
- The Battle for Investment Survival — Gerald Loeb (1935)
CONTINUE THE CONVERSATION
Source texts
- The Decision Book Fifty Models for Strategic Thinking