The Cognitive Systems That Shape Our Behavior
Y-Combinators Startup School episode featuring Stewart Butterfield, CEO and Founder at Slack, explored the process of getting a startup idea to found a company. Stewart mentioned a book he recently read called Thinking Fast and Slow, which was also recommended by my former co-founder Adarsh Uppula. I thought, I think it’s time I read this one.
Below are some of my take aways from Thinking Fast and Slow.
Your brain works in two ways:
System 1: you think and react instinctively based on patterns you have seen in your life and it doesn’t take much effort. An example: when you are just walking down the street you are likely only using System 1. It’s something you have done thousands of times. It’s instinctive.
System 2: your thinking is slowed down as you need to put effort into concentration to ensure you’re methodical in your approach. An example: you are betting on a hand in poker. You are thinking intensely, calculating the odds.
The reality is that most people will calculate odds in making a key decision using System 2, but then fall back on System 1 as most people live their lives wanting long term comfort, with limited, short-term pain.
Being aware of how System 1 shapes your decisions can impact the outcome of your situation
Human Thought Process
When most people see an familiar answer or pattern from the past System 1 will often default to that answer and cling to it, even if later information proves it wrong. With System 1 the “Halo Affect” can often kick in — For example: when I was twelve, I was taller than most of my peers so therefore most people assumed that I would be really good at basketball. When in fact, I was absolutely horrible at basketball.
Additionally, in System 1’s cognitive state most people rarely believe that everything tends to return to the average. If for instance you are playing blackjack and you are on a ‘heater’ (continuing to win hand after hand) that is NOT the time to continue betting. The law of “regression to the average” will ensure that your future blackjack hands are not strong, however most people attempt to find simple patterns in random events.
The world, including TechCrunch, will distort and simplify reality focusing on a few story-worthy events that happened rather than on the countless events that failed to happen. In entrepreneurship, you need a good idea, flawless execution and good luck. If you have more bad luck than good luck then your business may not work. For instance, if you started a company that grew to $10M ARR, but your product was completely reliant on the LinkedIn API and then one day your API access was shut-off that would be some bad luck. However, if for instance, you ended up having the fortune to join LinkedIn’s partnership network you’re company could have grown to a $100M business — in that case the ball bounced your way.
Experts Benefit and Lose
Above I made the System 1 cognitive process sound like a bad thing, however, it can be a really good thing too. During the Y-combinator Startup School interview with Stewart Butterfield he was asked why he thought Slack was a ‘good idea’. His response was an interesting one — Stewart said that his company raised $17M and were working on a gaming company called Glint, however, during his three years of working on Glint he noticed a pattern that he was running out of ideas to make his startup work. At the time his team had built an internal chat tool that they loved to use. Based on Stewart’s 20 years of ‘good idea’ pattern recognition he bet the remaining $5M in funding that he had in the bank on Slack. He bet that if they captured the Total Addressable Market that they could potentially be a $100M company. Fast forward a few years and Slack is $100M ARR with 38,000 paying customers. Stewart’s estimations were actually low. His System 1 ‘good idea’ pattern recognition, flawless execution, and good luck played out perfectly. Making good decisions depends on paying attention to the source of your information, understanding how the it is composed, assessing your own confidence about it, while also being aware that even top experts in fields can miscalculate outcomes.