Entrepreneurs, by the very nature of their roles, frequently navigate between analysis and intuition.
As we now know, analysis is deliberate, logical and exhaustive, intuition often feels like an effortless leap, drawing on past experiences and gut instincts.
Intuition is appealing. It’s quick, brilliant and gives the impression of decisiveness. Yet, as research has consistently shown, intuition is riddled with pitfalls.
Intuition, though compelling, is inherently biased.
It tends to see patterns where none exist, favors the status quo and evaluates new situations through the lens of past experiences.
Entrepreneurs, who operate in high-stakes environments, must guard against these cognitive traps that can distort judgment. Here are six decision-making biases to be vigilant about:
1. The Anchoring Trap
We are naturally drawn to the first piece of information we encounter. This piece of info becomes the anchor against which all subsequent decisions are based.
This bias can distort judgment, leading to decisions that revolve around an arbitrary reference point.
Imagine an entrepreneur negotiating a partnership deal.
The potential partner starts the discussion by saying, “Our typical contracts are worth $500,000 annually.” Even if the entrepreneur had initially considered a budget closer to $300,000, the $500,000 figure becomes an anchor.
This anchor skews his perception and makes $500,000 seem reasonable or even the standard even if it’s significantly higher.
To avoid this trap, the entrepreneur should come prepared with his own independent valuation and avoid being overly influenced by the anchor set by the other party.
2. The Status Quo Trap
Humans instinctively favor the familiar, perceiving change as riskier than it often is.
This bias tempts us to stick with existing practices, even when they may no longer serve us well.
Entrepreneurs must challenge this bias by actively questioning whether the status quo would be acceptable if it weren’t already in place.
Reflect on how current conditions came to be, consider how future scenarios might render the status quo obsolete. Evaluate alternative paths.
Confidence, bolstered by systematic analysis, can help override the inertia of inaction.
Imagine you run a successful retail store. For years, you have relied solely on in-store sales, believing that your loyal customer base and local reputation are sufficient for sustained growth.
Despite your competitors thriving online, you hesitate to launch an online store, viewing it as complicated or unnecessary. This inertia may lead to missed opportunities for growth in a rapidly digitalizing marketplace.
How to Avoid This Trap: Ask
- If I were starting from scratch today, would I build my business the same way?
- How would future market trends affect the sustainability of my current approach?
- What opportunities could I unlock by exploring new alternatives, even if they seem risky now?
3. The Confirming Evidence Trap
We have a natural tendency to seek information that validates our preconceptions.
Entrepreneurs are particularly vulnerable to this bias when seeking advice. They unconsciously gravitate toward advisors who echo their beliefs or frame questions to elicit confirming answers.
The antidote lies in cultivating a habit of self-scrutiny.
Entrepreneurs must ask themselves why they are seeking specific advice and whether it aligns with their biases. Playing devil’s advocate, challenging assumptions and exploring counterarguments, can provide a balanced perspective.
Let’s you plan on launching a high-end, eco-friendly water bottle.
You already believe this product will resonate strongly with environmentally conscious consumers.
To validate their idea, you consult a focus group composed of sustainability advocates and people who have previously purchased similar products.
Unsurprisingly, the group enthusiastically supports the idea. The outcome reinforces your belief that the product will be a success.
However, this approach overlooks a critical counterpoint: the broader market might find the product too expensive.
By seeking input only from those likely to agree with their idea, the entrepreneur falls into the Confirming Evidence Trap. Doing so, they miss diverse perspectives that could reveal blind spots.
How to Avoid This Trap:
- Use data-driven methods, such as surveys targeting a broad audience, rather than relying solely on supportive voices.
- Seek opinions from a range of stakeholders, including skeptics or neutral parties.
- Actively solicit counterarguments: “What could make this product fail?”
4. The Framing Trap
The way a problem is presented influences decision-making.
For instance, people are more likely to avoid risks when a decision is framed in terms of potential losses rather than gains. All this when the underlying probabilities remain unchanged.
If you are starting up, you must reframe problems to ensure objectivity.
This means casting decisions in multiple ways—considering both potential gains and losses equally. You must mitigate the influence of skewed narratives. To read more, check out this detailed article on the Framing Trap.
Imagine you are a food entrepreneur and have a yoghurt brand. You want to scale your marketing program, but you aren’t sure how to frame your message. You are weighing between two options:
- Positive Frame: The yogurt is labeled as “90% fat-free.”
- Negative Frame: It’s labeled as “contains 10% fat.”
Like a true-blooded entrepreneur, you’ll choose the ‘90% fat-free’ label because it sounds more appealing than ‘10% fat,’ even though both convey the exact same information. This may be a simplified example, but you get the gist.
How to avoid this trap:
- Reframe the Problem: View the issue from multiple perspectives (e.g., gains vs. losses)
- Focus on Core Data: Strip away emotionally charged language and concentrate on objective facts
- Seek Diverse Input: Consult more people on your team to avoid tunnel vision.
5. The Sunk Cost Trap
The pain of acknowledging our past mistakes often locks us into a cycle of poor decision-making.
Entrepreneurs may cling to failed projects, not because they are viable, but because they have invested significant resources – time, money or emotion.
To escape this trap, entrepreneurs must embrace the uncomfortable task of admitting errors.
Seeking advice from impartial parties, unburdened by prior involvement, can provide a clearer perspective. Equally, fostering a culture where others feel safe admitting mistakes without fear of penalty can lead to better decision-making at every level.
Kodak’s example comes to my mind. It’s been taught to death in B-schools, but it remains highly relevant in the context of the sunk cost trap.
Once a giant in photography, famously developed the first digital camera in 1975. However, the company hesitated to commercialize the technology. The C-suite feared it would cannibalize its highly profitable film business.
Their past investments in film production infrastructure, marketing, and distribution created a psychological barrier. They couldn’t bear the thought of abandoning it.
By clinging to these sunk costs, Kodak missed the opportunity to lead the digital photography revolution and eventually filed for bankruptcy in 2012.
How to Avoid the Sunk Cost Trap:
- Seek External Perspectives: Ask outsiders who are not emotionally tied to the startup. Their impartial view can help challenge entrenched thinking.
- Separate Past Investments from Future Decisions: Ask, “If I were starting fresh today, would I pursue this course of action?”
6. The Forecasting Trap
Forecasting the future is fraught with uncertainty and biases creep in.
Overconfidence in best-case scenarios or excessive caution driven by worst-case fears can both derail sound judgment.
To counteract these tendencies, entrepreneurs should scrutinize their working assumptions and ensure they are grounded in reality rather than outlier experiences.
I read about this British construction and facilities management company Carillion, which went bankrupt in 2018 due to faulty financial forecasts. Apparently, it made investments without accurately assessing its actual solvency, leading to financial overreach.
These issues often arose from isolated data systems and departments working in silos.
The only way I see to avoid this trap is by fostering open communication between departments to ensure that all relevant information is considered in financial forecasts.
As Daniel Kahneman reminds us, ‘We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events.’
From anchoring to sunk costs, these cognitive traps can distort your judgment. The antidote?
Embrace diverse perspectives, challenge your assumptions and reframe decisions with fresh eyes. Business success isn’t just about bold intuition—it’s about deliberate, informed choices.
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