Cognitive Bias Can Kill Startups
I’m sure we have all seen entrepreneurs with high levels of passion and confidence touting an idea that seems to make very little sense to us. Of course, we never see ourselves in this mode, yet we need to recognize that all humans see reality differently through a built-in set of “cognitive biases,” based on their own unique background of experiences, training, and mental state.
These biases are good, in that they allow us to quickly filter and make decisions in the constant barrage of information we face each day, but bad because they often lead to errors in reasoning and emotional choices. The worst case is called the “passion trap,” where a pattern of beliefs, choices, and behaviors feel good and become self-reinforcing, but lead to disaster.
John Bradberry, in a recent book called “6 Secrets to Startup Success” identifies five key biases that sabotage many passionate entrepreneurs in their startup decision making. I challenge any entrepreneur to honestly tell me that they have never fallen victim to any of these while making startup decisions:
- Confirmation bias. This refers to the human tendency to select and interpret available information in a way that confirms pre-existing hopes and beliefs. The antidote is to look for dissenting views that seem to form a pattern of concern. Then what you perceive as isolated exceptions, might indeed appear as a clear majority.
- Representativeness (belief in the law of small numbers). Many entrepreneurs tend to settle on conclusions they like, based on only a small number of observations or a few pieces of data. The new founder who hears positive reviews from three out of four friends may assume that 75 percent of the general population will react similarly.
- Overconfidence or illusion of control. Overconfidence leads founders to treat their assumptions as facts and see less uncertainty and risk than actually exists. The illusion of control causes startup founders to overrate their abilities and skills in controlling future events and outcomes. Both result is “rose-colored” plans, rather than realistic ones.
- Anchoring. This refers to our mind’s tendency to give excessive weight to the first information we receive about a topic or the first idea we think of. It encourages founders to cling to an original idea or, if pressed, to consider only slight deviations from the idea instead of more radical alternatives. The ability to pivot sharply and timely is at risk here.
- Escalation of commitment (“sunk cost” fallacy). Startup founders often refuse to abandon a losing strategy in an attempt to preserve whatever value has been created up to that point. They feel that they have put so much money, time, and energy into an idea or plan, that it must be the idea. Investing more into a bad idea doesn’t make it good.
Optimism, for example, is a typical entrepreneurial trait that improves performance, but only up to a point. In fact, moderately optimistic people have been shown to outperform extreme optimists on a wide range of task and assignments. There are a number of similar entrepreneurial characteristics that are recognized as good, but can be amplified to unhealthy levels, resulting in passion traps, or so-called “Icarus qualities.”
Every entrepreneur needs to be on the lookout for early warning signs of biases and passion traps that signal that you are in danger of undercutting your odds of startup success. Obvious ones are founders who are thinking or saying, “This is a sure thing,” or executives losing patience with advisers who point out risks or shortcomings in your plan.
In my experience, a great startup is more about great execution, rather than a great idea. It’s about converting your passion into economic value. To counter-balance the biases in your passion, the best approach is to look beyond your own mind and actively listen to your customers, your advisers, and your team. When was the last time you really listened?