How We Fool Ourselves
Common Entrepreneurial Blindspots that Distort Reality
Most often, our greatest assets and potential pitfalls lie within our own minds. As Richard Feynman aptly put it, “you must not fool yourself, and you are the easiest person to fool.” Last week I pointed out the criticality of “reality check” to success on your entrepreneurial journey. But that is easier said than done as reality is quite elusive.
Cognitive biases, those “features” of human psychology that we have inherited over millennia to survive, more often than not create blindspots for us that hide reality in plain sight. As such, if unchecked these biases adversely impact our assessment of risks, opportunities, and ultimately, our startups’ trajectories, taking us off course ever so subtly each day until it is too late. Thus, awareness of these biases is essential to charting the optimal path forward for your startup.
Here are the 6 most pervasive cognitive biases to watch out for:
1. Confirmation Bias
What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact. — Warren Buffett
One of the first lessons in entrepreneurship is to listen. Listen to your customers, partners, employees, competitors, suppliers, investors, etc. Yet, more often than not instead of truly listening, we are looking for information that fits with our existing beliefs. That is, we typically only hear echoes of our own convictions and filter out other inbound information. This confirmation bias tunes us to information that supports our views while ignoring dissenting evidence. While it enhances our focus and ability to be agile and efficient short-term, ignoring critical information often results in long-term disaster. Eastman Kodak Company’s dismissal of digital photography’s potential is a classic example of how confirmation bias can dethrone a well-established market leader.
Pro: Efficiency, focus, speedy development.
Con: Ignoring crucial pivot points or feedback.
2. The Dunning-Kruger Effect
The greatest enemy of knowledge is not ignorance but the illusion of knowledge. — Stephen Hawking
There’s a thin line between confidence and hubris. Sadly, entrepreneurs, just like the rest of us, overestimate their abilities, a phenomenon psychologists refer to as the Dunning-Kruger effect (e.g., most drivers rate their driving skills as above average). When we overestimate our competence in areas where we’re actually novices, we miss an opportunity to learn or seek help. And as entrepreneurs, we are often in way over our heads on all sorts of matters, from industry domain expertise to leadership and management skills. While entrepreneurial conviction is essential to continuing on the path, so is humility and the ability to recognize which path is worth taking. “Strong convictions, weakly held” is the battle cry of many accomplished entrepreneurs. The startup graveyard is filled with those that mistook confidence for real expertise.
Pro: Fuels the courage to start and keep going, driving us to action.
Con: Leaves us unprepared to effectively address challenges.
3. Status Quo Bias
Only the paranoid survive. — Andy Grove
Andy Grove’s quote above captures the essence of an entrepreneur’s relentless pace. Since every new decision threatens our comfort zone, requires work, and consumes energy, our brains prefer to keep things the same or hold onto a previous decision. Our status quo bias, our preference for the familiar, can be a death knell for startups in rapidly evolving markets. Irrational attachment to any idea or creation is recipe for disappointment, just as it was for Blockbuster video who clung to its established DVD rental business until it was too late. And the opposite is also true. For instance, Netflix’s willingness to pivot from DVD rentals to streaming, disrupting its own business model in the process, is an example of the power of challenging the status quo and going beyond the familiar in our startups.
Pro: Offers a baseline of stability in tumultuous times.
Con: Keeps us anchored to sinking ships of outdated models.
4. Sunk Cost Fallacy
The most dangerous thing is not to evolve. — Jeff Bezos
This warning from Amazon’s founder highlights the peril of the sunk cost fallacy. Startups often continue down unsuccessful paths, driven by investments of time, money, and ego, just as Theranos continued investing in a flawed technology despite mounting evidence of its shortcomings. Few walk out of a movie theater after realizing that the movie is not worth their time. And that cognitive resistance to change course grows exponentially as the amount of investments grows besides the size of a movie ticket. Recognizing when to take action, change course, walk out, or pivot, as Slack did from a gaming platform to a business communication tool, requires courage and conviction. But most of all, it requires a realistic assessment of costs and benefits, which is only possible when we take an objective stance unbiased by past investments and efforts.
Pro: Demonstrates resilience and dedication.
Con: Anchors us to failing strategies and lost causes.
5. Availability Heuristic and Recency Bias
People tend to assess the relative importance of issues by the ease with which they are retrieved from memory — and this is largely determined by the extent of coverage in the media. — Daniel Kahneman
Overestimating the importance of information that comes to mind easily skews perception of reality based on recent or vivid memories. Whatever has made the biggest impression tends to have the most intuitive persuasive power. If unchecked, you may find yourself making important product or strategy decisions not based on reality but based on anecdotes and stories that have made an impression. In our hyper-connected world, the latest tweet, the freshest headline, seems to demand immediate action, painting a picture of reality that’s as fleeting as it is vivid. Amazon’s long-term strategy, contrasted against the frenetic pace of daily trading and quarterly reports, offers a lesson in looking beyond the horizon, reminding us that true vision lies in seeing past the immediate.
Pro: Keeps us agile, ready to respond to the latest developments.
Con: Obscures the long view with the fog of the immediate. Amazon’s long-term orientation contrasts sharply with the short-sighted frenzy of daily market movements.
6. Optimism Bias
The best way to shield yourself from nasty surprises is to anticipate them. — Rolf Dobelli
Hope fuels the entrepreneurial spirit, but unchecked optimism clouds our judgment. The optimism bias can lead us to underestimate risks and overestimate success, painting an overly rosy picture of our ventures. Balancing optimism with realism, as Elon Musk does with SpaceX and Tesla , involves preparing for failure even as we aim for the stars.
Pro: Drives us forward through setbacks and challenges.
Con: May lead us to underestimate the obstacles ahead. SpaceX’s journey from repeated failures to historic success showcases the power of balanced optimism.
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👉 Navigating the entrepreneurial journey requires more than just chasing a big TAM; it demands a commitment to reality and a relentless examination of your core assumptions. Real opportunities are grounded in, well, reality: Real customer needs. Real market trends. And subject to real risks. Recognizing your biases and blindspots is the first step to taking advantage of real opportunities and positioning yourself with the best chance to address real risks. But awareness of a bias does not automatically render you immune to it. Next week, I will discuss actionable steps you can take to keep these cognitive biases in check.
Thank you for reading! Love to hear your thoughts and to continue this conversation in the comments. 🙏
