Last week, I started building a Quora presence. Admittedly, I’ve been a long-time lurker, and only recent answer-er on the platform. Partly to practice sharing thoughts. Partly to answer more specific queries. And partly to have fun. Yes, fun.
It just so happened that I came across a curious question then.
As an entrepreneur, have you found that the cognitive biases (i.e., systematic deviations from rationality that affect human decision-making) described in this article affect the decisions you make for your business?
The question cited this article. And the article itself detailed on 3 of the many cognitive biases entrepreneurs (well, people in general) come across.
- Confirmation bias – anything we see or hear that supports our own beliefs reinforces our beliefs, whereas the opposite sparks disagreement
- Sunk cost fallacy – our tendency to continue to hold onto hope for bad investments
- And, overconfidence – overestimating yourself and underestimating everyone else.
My answer
Simply, yes.
In fact, not just entrepreneurs, but most people are affected by the mentioned cognitive biases – confirmation bias, sunk cost fallacy/loss aversion, and overconfidence. It’s just that many people aren’t aware they have them, which can be detrimental to business, relationships, mental health, and more. I think the article even ranks the 3 from least noticeable to most noticeable from a self-assessment point of view. I’ll give an example of each – all of which I’ve seen before:
Confirmation bias – Stanford engineers are smart. → I will continue hiring Stanford engineers. The flip side is that you’ll be looking less into other populations of engineers who could also be amazing, like folks who are underrepresented and underestimated. Therefore, creating this self-perpetuating loop.
Sunk cost fallacy – I’ve hired this VP Sales that came highly recommended from multiple sources. But over the course of 6 months, I realized that this VP (1) couldn’t meet, much less beat, quota each quarter, and (2) has been unable to hire other great candidates to fulfill quota each quarter. But she will change. She’ll get better. She’ll grow into the role. While it’s okay to hire for passion, make sure candidates have at least a baseline of skills required for the role. And in a VP hire, a good proportion of the job description is hiring. The sunk cost here is the VP hire. While I don’t have to fire her, unless she’s really not doing her job at all, I need to find someone to top her who can perform in the role as fast as possible.
Overconfidence – My product is amazing; all of our competitors’ products suck. I’ve seen this way too often when founders pitch their startup. And while it’s great to be confident in your own product/team/yourself, it should never eclipse your perspective to value the work and commitment and results of others. A question I love asking founders who say “my product is amazing, everyone else is bad” is: What are your competitors doing right? If you were them, what would you say about your own product?
In closing
While these 3 are only a few among the myriad that plague our cognition (i.e. left digit bias, hindsight bias, anchoring bias, fundamental attribution error, etc.), hopefully, this post will shed a little light into the world of our own psychology. Sometimes before we can fix something, we have to first be aware of it.
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