The Six Worst Cognitive Biases For Entrepreneurs

Ben Lee

Ben Lee

CEO and Co-founder of Neon Roots

Ben Lee is the co-founder and CEO of Neon Roots, a digital development agency with a mission to destroy the development model and rebuild it from the ground up. After a brief correspondence with Fidel Castro at age nine, Ben decided to start doing things his own way, going from busboy to club manager at a world-class nightclub before he turned 18. Since then, Ben has founded or taken a leading role in 5 businesses in everything from software development to food and entertainment.

As an entrepreneur, you know the dangers that face your business all too well – between competitors, market fluctuations, and appeasing customers, running a business can seem more like walking through a minefield than anything else. But there’s one danger you may not be considering, and it can pose a greater threat to your success than any new competitor or PR scandal: your own brain.

While most entrepreneurs like to think of ourselves as intelligent, rational beings, research has time and again proven that the human mind is anything but rational. That’s because the brain uses a series of mental shortcuts, called cognitive biases, in the way it perceives the world and makes decisions. This isn’t necessarily a bad thing – many of these shortcuts help us process information and act quickly in new situations. For an entrepreneur, however, cognitive biases can be sinister: by warping the way you see the world, they can influence your decisions and lead you to run your business into the ground. While there are actually more than 20 recognized cognitive biases, there are six in particular that we think entrepreneurs should watch out for.

Confirmation Bias

Confirmation bias, also called confirmatory bias, refers to people’s tendency to see the world in a way that confirms their current beliefs – we look for, interpret, and remember information that proves us right. For an entrepreneur, the danger here is obvious: without a clear understanding of the things that might cause your business to fail, it’s impossible to overcome them.

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We hate to burst your bubble, but…

To beat confirmation bias, use the rule of 3: for any piece of data or situation you come across, try to think of three possible reasons behind it. This forces you to think of things from a different perspective, helping you uncover realities and causes you may initially ignore.

Shared Information Bias

Shared information bias refers to the fact that groups of people tend to spend more time talking about information that’s common to all group members – that is, things everyone already knows – than information that only some members know – that is, the things entrepreneurs really want to be talking about. This is a big reason why half hour meetings can so easily turn into hour-and-a-half time traps, and it can lead to a lot of talking with very little to show for it.

Beating this can be difficult, but one great strategy is to intentionally devote time to discussing unknowns for every point on your meeting agenda. By spending time on unknowns, you and your team will have to focus on the subjects that you understand the least, leading to more effective communication and problem-solving.

Sunk Cost Fallacy

Irrational escalation, more commonly known as the sunk cost fallacy, has probably foiled more entrepreneurs than any other bias out there. This is the perplexing phenomenon that people justify increasing investment in a decision with the fact that they’ve already invested time and resources in the decision, regardless of its actual merit – in other words, “because I’ve already worked hard at it, it’s a good idea to keep going.”

The problem with this thinking is that sunk costs are irrevocable – it’s money you’ve already spent and cannot get back regardless of future outcomes. This is the bias that causes entrepreneurs to continue with a business idea that should have pivoted long ago or mobile app developers to spend countless hours on a feature that customers don’t actually care about.

Overcoming this is critical. For every project, initiative, or investment you pursue, constantly ask yourself if it’s moving the business in the right direction. If the answer looks like no for too long, don’t keep going – just cut your losses and move on.

If this seems difficult, try taking a minute to stop and breathe. Some studies have shown that just 15 minutes of mindfulness meditation can help you overcome hesitations about abandoning sunk costs.

Anchoring

Anchoring, also called “focalism,” is the tendency for people to focus too hard on a certain piece of information when making a decision – often the first piece of information mentioned – without any reasoning for doing so. This bias is familiar to professional negotiators: the person who names the first number has the advantage of coloring the entirety of the negotiation, as the participants will tend to “anchor” their discussion around that initial number.

In entrepreneurship, anchoring is dangerous because it cuts off your options. If someone mentions email marketing in a meeting and you anchor your discussion around email marketing, you may be neglecting other forms of marketing even though they may actually be more effective for your business. Anchoring makes it difficult to see all of the potential choices on the table – which means it makes it impossible to know you’re making the best decision you can.

At Neon Roots, we have our own strategy for countering this bias. Making estimations in mobile app development is a risky business, and anchoring can make it even worse – so we use Planning Poker to prevent it. It’s a simple game that uses playing cards with numeric values to allow everyone to get their idea on the table at the same time, without interfering with others’ estimates.

While we use this technique during estimations, it’s easy to adopt for other kinds of decisions and topics. The main takeaway is to have everyone write down their ideas before saying them. This prevents one participant’s idea from interfering with other participants’ thinking, and it can help avoid anchoring in everything from brainstorming marketing strategies to estimating year on year revenue growth.

 

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Planning poker uses cards with numbers in a Fibonacci sequence to reflect the inherent uncertainty of large estimates.

Empathy Gap

Here’s a bias that can affect not only how you deal with your employees and coworkers, but also how you manage the most difficult employee of all: yourself. The empathy gap, also called the “hot-cold empathy gap,” is the general inability of people to recognize how being in a different physiological or emotional state will impact their behavior and decision making. In other words, it’s very hard to imagine being angry when you’re calm and it’s very hard to imagine being calm when you’re angry.

This has a host of implications for self-management and working with your team. While we hope that our coworkers are stoic in their decision making, the reality is that emotion is a powerful force – and it can come up for even the smallest reasons. While it may seem foolish that Tom is upset over not having his own stapler, his emotion in that moment is real and will have a sizeable impact on his behaviors and decisions. During the discussion, it’ll be hard to imagine how Tom feels – but as a team member, it’s critical to do your part by recognizing his emotions and considering the effect they may be having on his behavior.

The empathy gap also applies to how you manage your own decisions. When we plan for the future, we tend to imagine that we’ll be perfectly rational people, that we’ll perform at the top of our game every second of the day, and – here’s the big one for entrepreneurs – that we’ll never get tired.

Instead of falling for this trap, work to plan “emotional buffers” into your future. Learn to spot the areas of your life where emotional “hot states” may impact your decisions, then try to compensate for them by planning cool down periods or making decisions ahead of time.

Conservatism

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Slow and steady doesn’t always win the race.

This is one we deal with a lot during Rootstrap sessions, and it’s particularly dangerous to entrepreneurs in early-stage startups. It outlines the fact that when presented with new information, people tend to change their beliefs – and consequently, their behavior – too little in proportion to the new data. That is, if the data say we need to pull a complete 180, we’re more likely to alter our course only slightly – and that can easily be a death knell for new startups.

This has been said by many, but a startup is more like a search engine than an execution-focused business. Its job is to find (or create) a value proposition, monetization strategy, and business model that works, then to use that “winning combination” to grow. But during the early “search engine phase,” it’s critical for entrepreneurs to react quickly and dramatically to new information – in other words, to pivot. The conservatism bias means startups are more likely to change too little when they see new pieces of information, and more often than not, this ends up running the company into the ground.

Just like the other biases, beating this can be difficult. It’s hard for any entrepreneur to change their ideas, especially ones they’ve poured hundreds of hours of work into. The key is to collect, quantify, and listen to data. If the data tell you it’s time to make a change, your job is to act on it as quickly and effectively as possible.

To overcome this bias, capture and quantify data sets about your startup’s performance, then use that data to ask questions about how different elements of the business are going. If something seems off, it’s time to ask what’s not working, how you can fix it, and to act decisively on that conclusion. Just be sure you’re not anchoring your discussion on the first solution you come up with!

Awareness Is Everything

While mental heuristics are probably a good thing overall, they can be a formidable enemy for entrepreneurs. Ultimately, just being aware of cognitive biases is a big step in the right direction. Take some time to familiarize yourself with both the biggest biases and the ones you’re most prone to, then constantly look for them in your own thinking and decision-making.

By continually examining your own thought process, you can spot the biases that are affecting you and make decisions based on the real world – not on the distortions of your brain.

Thanks to Roman Soto, fhwrdh, and Rawpixel for the photos.