10+ Cognitive Biases that can Kill Your Startup
How your mind will trick you into making wrong decisions and what you can do about it.
People are fallible and irrational, and startup founders are no exception. We all make mistakes. As a startup founder, you’re even encouraged to make mistakes according to the ‘fail fast, fail often’ adage popularised by Eric Ries in his book The Lean Startup. While it is certainly true that you can learn from mistakes, as a founder you’re obliged to make sure you’re not blindly banging your head against a concrete wall of obvious errors. You don’t want to make mistakes you don’t learn from, and you don’t want to repeat mistakes made by others. You need to be able to filter the ‘interesting mistakes’ from the obvious ones.
What I so easily label here as ‘obvious mistakes’ are mistakes that are, for the most part, not obvious at all: the mistakes people make that are the result of thought errors.
We all are vulnerable to these thought errors, and to people (and marketing campaigns) that abuse them to influence us. These ‘weak spots’ in our internal logic have to do with something called cognitive bias.
Getting rid of cognitive bias may not be possible, but becoming aware of these hidden patterns influencing our internal logic is. As a founder, it is vital that you know the most important types of cognitive bias and become aware of them in yourself and others. If you don’t, not only do you run the risk of bad decisions, but you also allow others to influence you to your possible detriment. You need to be aware of such influence.
Does this mean all cognitive bias is bad? No. It is perfectly possible that cognitive bias pushes you further toward something that is the best decision. And it is also possible to use certain flavours of cognitive bias to create your own ‘reality distortion field’, making it easier to live through the stresses of startup life. Just make sure you know what’s going on in your own head so that these biases don’t blindside you.
Below you can find a selection of 10 important cognitive biases.
1. Optimism Bias
Optimism bias describes a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event. It is also known as unrealistic optimism or comparative optimism. Optimism bias is common and transcends gender, ethnicity, nationality and age. (source: Wikipedia)
Optimism bias is something founders need and use to be able to ignore the overwhelming odds stacked against them and their startup. More than 90% of startup initiatives fail, and only very few become successful. Still, founders have to believe their startup will be the exception. Try to keep it reasonable and look for proof of being that exception, rather than blind faith.
2. Status Quo Bias
Status quo bias is an emotional bias; a preference for the current state of affairs. The current baseline (or status quo) is taken as a reference point, and any change from that baseline is perceived as a loss. (source: Wikipedia)
Another important bias every founder has run into. This bias makes it harder for people to see a change as something beneficial. This can happen when you are trying to disrupt a market and you have difficulty convincing people of the benefits, or internally, when you need to change course and pivot. Try to remember that at least some of the pushback to change originates from this bias, and that people will adjust to a new situation and defend it just as fiercely.
3. Sunk Cost Fallacy
The Sunk Cost Fallacy makes it harder to change course after you have invested heavily in a course of action. It pushes you to throw good money after bad money: because you have invested thousands (or millions) on building an underperforming project, it is tempting to ‘recover the loss’ and throw more money at it to fix it. In many cases, this is a bad idea, and it’s better to cut your losses. When you find out you’ve been spending on a losing idea, try to calculate what it will cost you to continue vs what it will cost you to stop — and what opportunities you’ll gain by changing course.
4. Loss Aversion
In cognitive psychology and decision theory, loss aversion refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains: it is better to not lose $5 than to find $5. The principle is very prominent in the domain of economics. (source: Wikipedia)
We humans don’t like losing. In fact, we hate it. We hate it so much, that we rather spend time and energy preventing or avoiding a loss than trying to create extra gains. This is something you can see happening in any large company, but it also happens to founders, when they spend more time preventing potential losses than looking for new revenue streams. Don’t spend a day removing a $10 cost — use the Pareto principle and go for the biggest ones.
5. Zero-Risk Bias
Zero-risk bias is a tendency to prefer the complete elimination of a risk even when alternative options produce a greater reduction in risk (overall). (source: Wikipedia)
Besides hating losing, we humans also hate risk. In fact, we hate it so much, we like to overspend in time, energy, and money to completely eliminate risk if that is possible. Watch out for this one if you feel tempted to prevent a certain (relatively small) risk from ever happening. Try to calculate the risk by multiplying the cost of the problem with the probability it will occur.
6. Confirmation Bias
Confirmation bias, … , is the tendency to search for, interpret, favour, and recall information in a way that confirms one’s preexisting beliefs or hypotheses. (source: Wikipedia)
If you’re an early stage startup, confirmation bias might be the most important cognitive bias to learn about. When you’re starting out and are trying to validate your idea and find problem-solution fit, confirmation bias can severely hurt you. Make sure you keep trying to expressly look for signals that do not agree with your beliefs and hypotheses. If you can’t find any customers that hate your solution, then you’re on to something.
7. Availability Heuristic Bias
The availability heuristic is a mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a specific topic, concept, method or decision. (source: Wikipedia)
In a sense similar to confirmation bias, this mental shortcut will influence your decisions by making you only consider immediate examples. This means, that if you’re drawing examples only from a narrow experience, you may make bad decisions. Don’t assume that because three of your friends experienced a certain problem, everyone has that problem. Actively try to find counterexamples and do research.
Anchoring is mostly known from its effects in pricing. In an experiment, people had to assess if an item was cheap or expensive. Their opinion changed when they had been asked to write down their social security number just before: the many-digit long number influenced their opinion on the prices, making them view them as cheap. You can see this happening everywhere with discount prices and that third ‘platinum’ package on the Saas pricing table. Be aware that you’re vulnerable to this, and that it also works for other ‘relative’ amounts, such as risk, scale, etc.
9. Gambler’s fallacy
The gambler’s fallacy, also known as the Monte Carlo fallacy or the fallacy of the maturity of chances, is the mistaken belief that, if something happens more frequently than normal during a given period, it will happen less frequently in the future (or vice versa). (source: Wikipedia)
We humans have a very bad time when understanding chance, probabilities and statistics. You may be aware that the gambler’s fallacy exists, but it can creep up on you in unexpected ways.
10. In-group favoritism
In-group favoritism, sometimes known as in-group–out-group bias, in-group bias, or intergroup bias, is a pattern of favoring members of one’s in-group over out-group members. This can be expressed in evaluation of others, in allocation of resources, and in many other ways. (source: Wikipedia)
This bias is a double edged sword. While it can help create a bond inside your founding team, where you feel as if you’re taking on the world together, it can also make you believe that you are right, and everyone else is wrong. This obviously is a dangerous thing to believe when it is not backed by evidence. The strategy of creating a common enemy is something that can beef up the risk associated with this bias considerably.
These were just 10 of the dozens of biases that we humans live with every day. If you are a founder, I urge you to read more about them and understand more of how they influence your decisions — and when they do so in a detrimental way.
Books about the subject of irrationality and cognitive biases:
Thinking Fast and Slow, by D. Kahnemann
The Art of Thinking Clearly, by C. Dobelli
The Upside of Irrationality, by Dan Ariely
Predictably Irrational, by Dan Ariely
Payoff, by Dan Ariely
The Mom Test, by Rob Fitzpatrick