Exposing Bias: Training the investor brain

I went from thinking investor behaviour was based on traditional logic and reason to quickly finding out it deviates pretty fast from that ideal.

Emotions, experiences, and even personalities are factored into the process all investors go through, when choosing a fruitful venture worth your time and money. In fact, I couldn’t believe how many external factors come into play when investing. I’ll tell you the main investor biases here, so you don’t have to lose a few years of first investments to making bad decisions.

Intuition alone cannot constantly drive good decisions. But being able to identify these certain biases within yourself, is what can be key to understanding how to improve these mental processes of elimination when approaching any big investment decision.

“Above all else, I want you to think for yourself, to decide 1) what you want, 2) what is true and 3) what to do about it”

― Ray Dalio, Principles

Cueto and Zhang’s literature research paper New Venture Decisions, notes that in a first instance investors are biased towards action and creation, with their specific characteristics giving them an impulsive tendency to go with opportunities that are directly available, nevertheless always within their comfort zone (i.e. their “bias limitations”). However, in a second instance, it is noted that investors need to “sit down” and take the time to evaluate opportunities created in the new ventures. Which in turn would provide them with a ground base to efficiently decide which investment opportunities to pursue.

Option Paralysis

Investors historically have had to process large amounts of data, for example analyzing technology trends , teams, markets, business models and all different types of risks. All this information that you have access to and that you obviously want to search for, because you want to optimise your investment choices, can result in an information overload.

Research has found that the more information you receive, the more confidence you’ll also show in taking decisions, big ones. As Roberto Bonanzinga from Balderton Capital states, “some investors never give an answer and keep going asking for additional data points in the hope that the data will make the decision for them.”

So even though everything I’m saying sounds pretty straightforward and easy to avoid, it’s really not because the reality is that the more information you find out there, the more you’re going to continuously look for.

You want to be accurate in your decision making, and only slightly confident. The adrenaline is what it’s all about, you’re not growing if you don’t feel that rush when you sign the deal.

Copycat syndrome

Also known as similarity bias, investors are subject to rating other people in a better way the more similar they are to themselves, in other words similarity describes the extent to which there is resemblance and similitude between the founders values and your own values. When I speak of similarity, I’m talking about external characteristics, but also your thinking processes as an investor, the internal aspect.

For instance, two individuals may arrive to a similar conclusion or judgment regarding some actionable decision (e.g. to travel somewhere), but they could have done it by engaging in substantially different reasoning processes. It’s vital to keep an eye on how you categorise people, in a ranking with being similar to yourself.

With a matchmaking data driven platform such as Fundsup, the algorithm takes this bias out and matches you with startups and young companies that have a profile matching your requirements, this is also part of what we’re doing with gamification. I’ve had to come up with ideas about how we could solve investor biases, not eliminate them.

Anchoring

As a human being, you’ll selectively filter, paying more attention to information that supports your personal opinions and consequently ignoring the rest. You’re likely to look for information that supports your original idea about where you want to invest, rather than looking for information that contradicts your ideas.

It’s good to monitor your preconceived opinions when encountering a new founder, as an early stage investor. So you’re first impressions are hard to shake, therefore your thinking is going to be subject to what is known as a confirmation bias.

Overall, no matter where you’re from, where you’re going or how much money you have to invest, you have your mission and your vision in the back of your mind. Remember your intuition alone cannot consistently drive good decisions. So always ask yourself the following questions: what is your brain doing to make you run riot? What emotions are at work in your investment decisions? Are they guiding you toward appropriate due diligence or wrapping your ego in cotton wool at the expense of your net worth? Keep in mind that more of everything, apart from money, does not necessarily equate to better decision-making and better investments.