Success Strategies

The 4 Cognitive Biases Entrepreneurs Should Avoid

Here's how to stop potentially problematic ways of thinking from becoming career blind spots.
The 4 Cognitive Biases Entrepreneurs Should Avoid
Image credit: James Boast | Getty Images
Entrepreneur Staff
Associate Editor
7 min read

Launching a business isn’t for the faint of heart -- or the faint of mind.

About half of startups fail within five years, according to Bureau of Labor Statistics -- and though issues with scaling, funding and founders can be chief drivers, there’s often another key hiccup behind the scenes: cognitive bias. It’s a consistent deviation from rational judgment -- the idea that we create our own individual “social realities” to dictate our actions. Humans’ built-in cognitive bias affects almost everyone in some form or another, but it’s especially illustrated in entrepreneurship.

Prince Ghuman and Dr. Matt Johnson are the co-founders of 15Center, a company that focuses on the ethical use of neuroscience in marketing. Ghuman likens the challenges of entrepreneurship to “learning to fly a plane as you’re building it.” It’s tough already, so entrepreneurs should do their best to avoid additional blind spots -- and humans’ built-in cognitive biases make for colossal ones.

Here’s what to stay aware of when it comes to your own potential bias -- and how to keep it at bay in your business.

Optimism Bias

AKA: “That won’t happen to me.”

What it is: It’s human nature to feel as though each of us is the exception to “the rule.” No matter how unsafely someone may drive, they feel they won’t get into a car accident; no matter how often they smoke, they feel certain they won’t contract lung cancer. It’s true for the flip side, too: Think about that spark of hope you may experience any time you purchase a lottery ticket -- this time, it might just be me! -- or when you search for a parking space in a packed lot. The optimism bias transcends statistics, research and base rates, and entrepreneurs specifically skew towards this way of thinking. Endeavoring to start a business today, in the wake of current startup failure statistics, necessitates a substantial appetite for risk.

The optimism bias is a “double-edged sword,” Ghuman said. The contagious nature of positivity can make for great leaders that people are drawn to follow, and optimism can yield more funding, better morale, a slew of partnerships and more. On the other hand, the optimism bias tends to skew towards blind optimism -- and that can catch up with any entrepreneur who doesn’t think critically about their business model.

The fix: Before launching your idea, try writing a well-researched eulogy about why it failed, Ghuman said. Think about all the reasons why your idea could fail in the current market and how it would measure up to competition. The exercise tricks you into considering your big idea more objectively: If the idea can’t withstand the exercise, it may not be the best bet. And if you still feel it can survive -- even after the eulogy -- you can take extra steps to protect against the kind of failure you outlined.

Planning Fallacy

AKA: “I can probably do this faster than the average person.”

What it is: Imagine someone has just handed you an IKEA box containing everything you need to build a wooden dresser. How long might it take you to build? Now, ask yourself: How long would it take the average person? If your second answer was a longer timeframe, you’ve probably fallen victim to the planning fallacy.

Humans have a systematic tendency to underestimate how long it will take for us to create something -- we almost always overpromise. Entrepreneurship can illuminate the planning fallacy more than any other type of career. By their very nature, entrepreneurs are building something that’s never quite been done before, which means they tend to over-promise and under-deliver when it comes to time expectations. The kicker: Even past experience with similar tasks doesn’t necessarily make people better at avoiding the planning fallacy. Just look at Tesla CEO Elon Musk -- though the Model 3 is the company’s third generation vehicle, Musk has still had a difficult time keeping to any sort of timeline.

The fix: Try a “two-headed solution,” Ghuman said. First, even though the planning fallacy is an especially strong cognitive bias, self-awareness can go a long way. Second, make legitimate timelines with supporting evidence backing them up: Look at other projects that are in any way comparable to yours -- just as you’d look at real estate “comps” when buying or selling a home -- and use them as objective measures to inform how long it may take you to reach your goal.

Sunk-Cost Fallacy

AKA: “I’ve already come this far …”

What it is: It’s easy to feel an emotional connection to an idea after investing any amount of time or money. Let’s say you launch a restaurant for $20,000, but it’s losing money -- and it doesn’t look like a turnaround is on the horizon. It’s human nature -- via the sunk-cost fallacy -- to feel compelled to continue operating even if it’s likely you’ll end up losing a steady stream of more money. And if you’ve spent three years working on a new app and then realize it may not have legs to stand on in the current market, you’ll probably balk at scrapping the idea -- you’ll want to have something to show for those three years, even in a case where the smarter option would be starting on something brand new. It’s important to remember: An idea’s chances to succeed aren’t necessarily increased by your investment of time or money. That’s why it’s vital to re-evaluate an idea regularly: Is the venture’s output -- your own satisfaction, future payoff, potential success in the market -- still worth everything you’re putting in?

The fix: Don’t be a perfectionist, Ghuman said. Instead, commit to a launch date -- then launch early -- to limit a slew of potential last-minute costs. It’s also a good idea to avoid scaling too soon and too quickly. That way, entrepreneurs can avoid attaching even more “psychological weight” to their new ventures.

Confirmation Bias

AKA: “All signs point to yes.”

What it is: Humans have a strong tendency to see things -- and interpret new information -- in ways that “confirm our pre-existing beliefs,” Johnson said. We tend to pay extra attention to any supporting evidence for our belief and find a way to dismiss the contrary. For example, in politics, that could mean focusing on a candidate’s positive quotes and references, while ignoring one of their negative stances on an issue you care about. In business, this can mean looking for proof your idea is worthwhile and dismissing any naysayers or negative evidence -- while it’s important to stay positive, confirmation bias can translate to a significant setback for entrepreneurs.

The fix: Try appointing a “contrarian” or “devil’s advocate” on your team or in your network, Ghuman said. No matter how they feel personally, it’s their job to refute the popular opinion and, any time you propose an idea, to explain why it’s not the best bet. Respect what they say, and think critically. They’re not there to dissuade you from thinking big -- rather, their job is to make you better at defending ideas that are strong enough to withstand the real world.

Related: How to Be a Confident Badass at Work (and Silence That Little Voice in Your Head)

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