Behavioural Economics

Don’t read analyses of startup success. They are full of BS.

Why mostly all business journalists suffer from Hindsight Bias.

The internet is littered with articles analysing the wild success of certain Silicon Valley startups. The MO is mostly the same. A certain company did certain things in certain situations and they are now reaping the benefits because of that. Cherrypicked actions/policies/strategies are presented and they are attributed to the overall success of the company. The underlying message is this: if you have a startup and you want to attain wild success, maybe you should do something like them — often you have to be very unconventional and do what others aren’t doing.

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One article after the other claiming to know it all

The funny thing is that sometimes you’ll find a certain strategy working for one company, and against another company: “Why too much focus on growth led to the downfall of Company A”, “How a growth-at-any-cost mindset made Company B attain billion dollar valuation”, ”Why an anti-growth mindset was the secret sauce to Company C’s success”.

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All these are classic examples of back calculation. All the dots connect easily when the end result is known. Even a fool can explain the past when the results are known. The hard problem will be to predict the future.

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Today, business journalists and analysts opine that Google’s dominance was predestined, due to their innovative culture, or their “Don’t be Evil” mantra, or their talent hiring process, or their [insert your favourite secret sauce here]. But back in 1997, their business model would have seemed like a big joke to these very journalists, and each of them would have snorted had a prediction of them becoming a multi-billion dollar company been made.

A decade later, in 2007, analysts had painted a rosy picture of the coming years of the economy. All was good. Just twelve months later — boom! When you read about the economics crisis now, it all seems very clear and obvious — monetary expansion under Alan Greenspan, lax validation of mortgages, corrupt rating agencies, low capital requirements, and so forth. You wonder why weren’t they able to predict it.

This is called the Hindsight Bias. In retrospect, everything seems clear and inevitable. In 10 years if you become stupid rich because of pure dumb luck, looking back, you will rate the probability of your success a lot higher than it actually was, and analysts will attribute it to certain special qualities that you posses. All full of BS!

It may not be natural for you to learn from history, but you don’t learn anything of any value from the retrospective, compacted theories compiled in textbooks taught in schools. They are written and storfied to keep children engaged and interested. History is much of complex and nuanced. The right way to learn from history is by reading the journals, facts, and predictions from that period. This will give you a much better sense of just how unpredictable the world is.

If you wish to personally understand why Pinterest, or Google, or Facebook is successful, you might be inclined to go on the internet and search for phrases like, “Secrets of Facebook’s growth” or “How did Pinterest become to successful?”, and you’ll surely get several materials confirming your hypothesis…err bias.

It usually works like this. For example, Person A believes climate change is a serious issue and she only searches and reads stories about environmental conservation, climate change, and renewable energy. As a result, Person A continues to confirm and support her current beliefs.

Meanwhile, Person B does not believe climate change is a serious issue, and she only searches out and reads stories that discuss how climate change is a myth, why scientists are incorrect, and how we are all being fooled. As a result, Person B continues to confirm and support her current beliefs.

If you are seeking to confirm a hypothesis, you’ll most likely confirm it. The more you believe you know something, the more you filter and ignore all information that contradicts it. Any indications to the contrary of your precomposed notion remain unseen, or are quickly dismissed as “exceptions” or “special cases”. You have become blind to disconfirming evidence. You have fallen prey to Confirmation Bias.

Whether you go through life believing that people are inherently good, or people are inherently evil, you will always find proof to support your case. Both philanthropes and misanthropes simply filter disconfirming evidence and focus on whatever supports their views.

Business journalists suffer the most, both from confirmation bias and hindsight bias. Often they formulate an easy theory — a simplistic one that is easy to digest, back it up with two or three pieces of evidence, and call it a day. “Google is so successful because the company nurtures a culture of creativity.” Once this idea is on decided, the journalist corroborates it by mentioning a few other prosperous companies that foster a similar culture. Rarely does the writer seek out disconfirming evidence, which in this instance would be struggling businesses that live and breathe creativity or, conversely, flourishing firms that are utterly uncreative. Both groups have plenty of members, but the journalist simply ignores them. If he or she were to mention just one, the story line would be ruined and his job gone. Analysis of startups don’t seek out the truth, or secrets, or strategies. They simply record certain biases and confirms them via words.

It would be a good habit to ignore articles confirming the past. That’s Pseudoscience and it’s mostly full of BS. Pseudoscience can never be falsified as it dwells in the hindsight and always finds a way to confirm its own bullshit. Any contrary evidence is usually an “edge case”. Real science talks about what’s ahead, in the future and stands the risk of being falsified.

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