The first stage in minimizing the effect of behavioral biases is awareness of those biases. Beware … [+]
As an advisor to several starting entrepreneurs launching a startup app idea, I find it interesting how entrepreneurs come up with ideas and plans. Most of the time, our decisions are influenced by behavioral biases that, contrary to popular beliefs, can be beneficial as much as they can negatively affect startup performance.
Understanding how we make decisions is the least we can do to optimize the outcome of those decisions. Here are 5 common behavioral biases that drive and influence our actions.
One of the first steps entrepreneurs take when coming up with a new startup idea is research the competition. The availability bias is the tendency for entrepreneurs to make judgments about the probability of events based on how easy it is to think of examples.
More specifically, it is about making decisions based on what is available to us. In many cases, what we know may not be a fair representation of the population. For example, when launching a new startup, entrepreneurs are sometimes biased to follow a certain plan just because a competing product successfully executed on that plan.
However, not only does the success of the competing product not guarantee their success, what about the other companies in the space that may have followed similar or different approaches that they’re not aware of? Research is key.
It’s important to embrace chaos but who likes it? The reason we plan is so we can follow steps we hope will take us to a destination, our goal. The truth is, in entrepreneurship, plans change all the time and it can be mentally challenging to switch directions and deviate from a plan we worked very hard to create.
The confirmation bias is the tendency for entrepreneurs to seek information that confirms their existing opinions and ignore those that are inconsistent with their preconceived knowledge. To minimize the affect of this bias, know that part of a plan is a change of plan. In other words, expect you’ll change directions at any time.
Start with a vision but only focus on short-term plans based on the information you have today. Consistently interacting with customers and mentors will also make a big difference in your ability to make unbiased decisions.
3. Belief Perseverance
Related to the confirmation bias, belief perseverance is the tendency for entrepreneurs’ opinions, once formed sticks with them for too long. Most entrepreneurs are reluctant and avoid searching for evidence that is against their beliefs especially after a long research and planning phase. Even if they find such evidence, they tend to treat it with excessive skepticism.
In early-stage startups, even influenced by the confirmation bias and belief perseverance, entrepreneurs are better off taking cautious steps to test ideas quickly before investing significant resources in building advanced products. This approach can indirectly help you avoid biases by quantitatively testing your assumptions and hypotheses to provide you with the proof you need to move forward on stronger foundations.
4. Planning Fallacy
When was the last time you underestimated the resources needed to complete a task or the amount of work that can be achieved in a given time? We’ve all been there. Over time, this bias can be very costly especially for early-stage self-funded startups that may start with a budget but quickly realize they need more resources. Here are two important budgeting tips to keep in mind.
- Know that building and launching an app is just a small phase in a startup. You’ll need more resources for the next stages. Therefore, exhausting your funds on the first version can soon leave you out of capital.
- Frequent changes in development scope is one of the main reasons why software projects go over budget. This usually happens in long development cycles when, during this period, the founders gather key insights and realize changes are needed. To avoid incurring costs in these situations, reduce the development scope so that you don’t have to wait months to launch the product. In other words, build and release quickly.
Fischhoff, Slovic and Lichtenstein (1977) show that in estimating probabilities of the occurrence of an event only 80% and 20% of the time that 100% certain and uncertain projected events occur, respectively.
It’s important for every entrepreneur to gain confidence in their ability to accomplish their goals, however, excessive confidence can be detrimental to a startup. For example, as mentioned earlier, many entrepreneurs feel overconfident in their product’s potential and fit to solve customers’ problems and needs so they spend most of their resources building an advanced version. Most of the time, the product requires several iterations and pivots that can lead to startup failure due to lack of entrepreneurs’ interest and resources.
In conclusion, the first stage in minimizing the effect of behavioral biases is awareness of those biases. Availability, confirmation, belief perseverance, planning fallacy and overconfidence are a few of the most influential biases in entrepreneurship.