To succeed as a startup founder you need to make as many correct decisions as possible in the context of the available information and resources.
Consequently, being aware of some of the common cognitive biases that tend to hinder your decision-making process is invaluable, as it will help you set up systems in place to counteract their effect.
Here’s a non-exhaustive list of some of the most common biases that can be exceptionally harmful in a startup process.
1. Sunk Cost Fallacy
The sunk cost fallacy is one of many concepts from economics that are important for startup founders to understand.
A sunk cost is simply a cost that has been generated and cannot be recovered. The fallacy is that the more resources you have invested in a certain project, the more likely you are to continue investing in it. Of course, this is highly irrational if all other signals point toward abandoning the project.
Since the fallacy is psychological, it is entirely applicable to non-monetary investments. For example, if you have defended a hypothesis in front of your colleagues, you have invested your reputation into the hypothesis. The sunk cost fallacy would make you less likely to abandon it, as you would feel your reputation is on the line.
Naturally, this is extremely dangerous in a startup context because in the early stages of your project you’d have to test and discard a lot of assumptions and hypotheses in order to iterate and pivot correctly until you find product market fit. If the sunk cost fallacy makes you inflexible, then your chances of finding product-market fit decrease significantly.
2. False Consensus Effect
The false consensus bias is the inclination for people to overestimate how much other people agree with their ideas, actions, views, and values.
For founders, this is very dangerous for two reasons.
First, you’re likely to project your own views on your potential customers. If you are not a good representative of your target market, then this could lead to considerable distortions in your understanding of the real customer wants and needs, which would prevent you from finding good product-market fit. To counteract this, it’s crucial to run customer interviews and, if possible, feedback surveys to correct your assumptions as objectively as possible.
Second, you’re likely to project your own values on your team members. This would lead you to misunderstand their priorities and overall motivation to work on your project, which could create internal friction and inefficiencies. Once again, the cure is good communication – you need to be interested to understand what makes your team tick.
3. Confirmation Bias
Confirmation bias is the tendency to search for information proving your already-established worldview, rather than disproving it. It is obvious that it’s crucial to try to avoid this when constructing your idea or product validation tests or when talking to customers.
Don’t try to defend your assumptions and decisions – instead, try to gather unbiased feedback so that you would have a higher confidence level in the results of your tests. Fake confirmation of your ideas might make your life easier as it would give you a scapegoat for your failure. Yet, in the long run, it’s much better to have to overcome your ego and succeed than to defend it but ultimately fail.
4. Anchoring Bias
The tendency to rely heavily on the first piece of information you have on a topic. The anchoring bias is often used in negotiations as a trick to bring the expectations of the opposing party closer to your desired outcome.
In startups, it is very important not to unwittingly play this trick on yourself. For example, if you’ve been offering a service for free you might feel reluctant to raise the price significantly even if it is the right thing to do for your business. The reason is that you are already anchored to the free offering.
You should be continuous about this bias and let the people on the other end of the table decide if a price is too high or too low for them instead of you doing it for them preemptively in an effort to avoid embarrassment.
5. Optimism Bias
The tendency to overestimate the likelihood of positive outcomes and underestimate the likelihood of unexpected problems occurring.
The practical tip is to allow for a margin to compensate for the optimism bias. For example, when budgeting, it’s a good rule of thumb to put in your budget an allowance for unexpected expenses – the more unfamiliar the project, the larger your allowance should be.