Cognitive bias and startups

[akula]

Just a quick note on my favourite cognitive biases (tricks our brains play on us) and how they relate to startups....in no particular order. Overall, because the human brain is subject to a lot of these flaws (not inherent in computers), the point of this thread is to help you a) not fall victim to these biases and b) how to exploit these bias so you can make stakeholders (customers, employees, investors) do what you want them to do.

Bias blind spot: the tendency not to compensate for one's own cognitive biases.

This is a problem which makes all the other biases a problem - not realising that our (meaning entrepreneurs, investors, customers, employees etc) decisions are subject to bias.

Bandwagon effect - the tendency to do (or believe) things because many other people do (or believe) the same.

This bias works against entrepreneurs when they start web 2.0 shops because everyone else is starting one (not because it's a good opportunity). Whilst you might try to conclude that "if everyone's doing it, there must be something to it", this reasoning overlooks the fundamentals of manias and falls victim to other biases like confirmation bias.

The positive way to use this bias is in how it relates to customers making purchasing decisions, or investors/employees/partners and how they make their decisions

Confirmation bias - the tendency to search for or interpret information in a way that confirms one's preconceptions.

This is a dangerous bias which precludes entrepreneurs from making good decisions because their brains ignore all evidence detrimental to their decisions. Entrepreneurs don't like hearing that they might have a bad idea, which is why theu don't do primary market research (because it might prove discouraging), which leads to entrepreneurs spending an enormous amount of time and money to develop an idea - only to find that they're the only person in the world who thinks that their idea is a good one.

On another hand, playing to confirmation bias helps entrepreneurs sell their products because they can craft the pitch in such a way that does not conflict with the customer's confirmation bias.

Endowment effect - the tendency for people to value something more as soon as they own it.

This bias is dangerous when entrepreneurs fall victim to it and conclude that just because the idea is theirs, then it must be a good idea. On another hand, this bias can be successfully exploited when you offer trial periods for products - because once the customer is in possession of it - they will put a higher value on the product and not return it, even if they would have never bought the product in the first place.

Likewise, when pitching for money, it's important to make the investors feel that they own the business idea. If they don't have that feeling, the investors will chose a rationally inferior idea over yours - because they might be having an emotional attachment to it.

Illusion of control - the tendency for human beings to believe they can control or at least influence outcomes which they clearly cannot.

This bias forces entrepreneurs to agonise over decisions, worry and procrastinate. Likewise, the bias is responsible for entrepreneurs failing to quit startups. This happens because the entrepreneur believes that they can do a turn around and "make things better", even though the future prospects of the venture may be entirely out of the entrepreneur's control.

Information bias - the tendency to seek information even when it cannot affect action. This is another word for analysis paralysis and business planning.

Mere exposure effect - the tendency for people to express undue liking for things merely because they are familiar with them.

This bias works against entrepreneurs when it comes to competition and pitching for money. On the one hand, entrepreneurs often fail to discount that even though their product is better - the customer is more familiar with other substitutes. This often leads to the entrepreneur trying to differentiate them selves from the competitor (which makes things worse) - when they should be focusing on making the customer comfortable and familiar.

Likewise, when it comes to money - entrepreneurs continue to wonder why investors don't invest in strangers - even though the stranger has better everything compared to the friend.

Should I do some other ones?