The impact of cognitive biases on entrepreneurship

The human brain is complex and capable of incredible things, but it can make extremely flawed decisions because of the way it processes information through unconscious mental modelling. Cognitive biases are all sorts of “mental mistakes” that we tend to make, that affect both our thinking and actions. In fact, there are over 100 different known cognitive biases.

These biases are systematic errors in the way information is processed, thus providing “blinding” effects on the way reality is perceived, and how such information is then extrapolated.  It can hinder our thinking to confirm existing beliefs (which may or may not be right), as it refers to our tendency to only search and remember information that supports our beliefs, values, and behaviours, often leading to poor or bad decision-making outcomes. They are one of the greatest hindrances for entrepreneurs resulting in a high level of failure in new enterprises.

Seeking to understand cognitive biases, will help overcome some of the pitfalls that affect the success of startup entrepreneurs. Some of the more prevalent cognitive biases that entrepreneurs should be aware of include confirmation bias, Dunning-Kruger Effect, optimism bias, and cognitive dissonance.

When evaluating business opportunities, there are a number of fatal biases in the way entrepreneurs process information including not conducting proper market validation, (instead solely relying on “gut feeling”), confirmation bias, making wrong assumptions, and not “knowing what you don’t know” (Dunning Kruger Effect).

When confronted with a difficult decision, most entrepreneurs rely solely on an egocentric view, and many bad decisions have been made with hubris and overconfidence, resulting in improper or insufficient market validation.

An entrepreneur can reduce the impact of confirmation bias, first by learning to develop an open mind to new ideas and not continue to cling to a “fixed-view” position. They must be able to learn to use logic and reasoning to question everything and become sceptical. They must also learn not to make “cause and effect” inferences without properly examining all evidence presented (whether it agrees with their point of view or not). Furthermore, an entrepreneur should also take the time to get multiple and credible points of view, which will help them develop insight, and they should try not to judge differing opinions but rather listen to them.  Doing this will help develop deeper empathy and understanding which is beneficial for a successful outcome. Finally, only when they are able to process various points of view and examine all credible evidence, will they be in a position to make a proper judgement or decision on any business opportunities.

So, you’ve been warned, as an entrepreneur, not being able to recognize your cognitive biases, will result in a high probability of business failure!

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By Tobi Nagy