Cognitive biases and wannabe entrepreneurs

Manoj K C_1989 EEE
Manoj KC
1989 EEE

Self-help books, motivation gurus and life coaches are an industry by itself. And like in any industry, there are the good, the bad and the ugly. On a general scale, the potential for a self-help book to do damage is limited and guarantees the benefits of a placebo. Good ones can help nudge your actions in a certain direction that may result in some positive outcomes if you are disciplined enough to follow through.


Self-help Genre per se is built on cognitive biases, mainly survivorship and hindsight bias. Cognitive bias is a term introduced by Amos Tversky and Daniel Kahneman in the early 1970s. It influences our decisions based on quick thinking making it error prone. Instead of processing the information in a systematic and logical manner, we take decisions based on judgement and heuristics. This is an evolutionarily programmed behaviour and works well in a lot of scenarios and most of our daily chores are accomplished by what is described as “System-1 thinking” in the book “Thinking fast and slow” by Daniel Kahneman. “System-2 thinking”, on the other hand depends on us using our brain to systematically and logically working out the solution and then deciding. This is slow and consumes a lot of energy. Though only 2% of our body weight, the brain consumes 20% of the overall energy consumed by us. During the hunter gatherer phase, which is not too far back in the past, it would have been very inefficient to spend so much energy on thinking. In a forest, probability of survival depended on our ability to catch a prey, while avoiding being a prey to a predator. In such a condition it is not wise to wait till you can ascertain if the movement in the nearby bush is because of a hustled tiger or just the wind. It is better to err on the side of caution and instinctively run for safety. Evolutionary processes are slow and hence a few centuries of existence without being a hunter gatherer does not erase our instincts. Almost all our daily life activities are governed by “System-1 thinking” or instinct.

As already described, actions based on heuristics or system 1 thinking is fast, energy efficient and works in most of the cases, but are error prone and are influenced by cognitive biases. But with all the awareness about cognitive process, we can try not to be fooled by cognitive biases while taking “costly” decisions. So, what is it about cognitive biases and entrepreneurship?

How not to be wrong” by Jordan Ellenberg starts with a story from 2nd world war about Abraham Wald and the missing bullet holes. Abraham Wald, a Jew hounded out of Europe by the Nazis, ends up as a top statistician at The Statistical Research Group (SRG), a group of top mathematicians working round the clock on war strategies. SRG provided strategic directions on all aspects for sorties by the allied forces. One of the problems that came up before the SRG was to provide advice on the best place to armour the fighter planes to reduce the chance of being shot down. The safest bet is to armour the whole plane, but that would make it heavier, thereby reducing the manoeuvrability and increasing the fuel consumption. There must be an optimum and SRG had to advice where exactly to armour the plane. They were provided with data about past sorties and where the planes got hit the most, which was the fuselage, and the least was on the engine. The obvious answer was to armour the places with maximum bullet holes, the fuselage. But Wald insisted that the armour must be in places where there are no bullet holes. He rephrased the question from where the bullet holes are to where the missing holes are. The missing holes were on the missing planes, which means that whenever the plane got hit on the engine, they went down, whereas the ones that got git on the fuselage could return to the base.

The story of missing plane eloquently explains survivorship bias. We often hear about how certain structures have lasted for many years and a correlation is drawn to how the engineering was much better “then”. Or about people who are close to 100 years old and how healthy people of “that” generation are. Whenever we hear glorifications based on such correlation, remember the story of the missing bullets. Ask where the missing bullets are.

Entrepreneurial aspirants should vary of survivorship bias. What you hear are only success stories. As always, vanquished has no tales and in this case, there are significantly more vanquished than winners. If you divide the entrepreneurial journey in to 5 main stages: the Boot strap, Angel investment, Early growth (Series A funds), Mid to late-stage growth (series B to E funds) and finally the strategic buyout or IPO, on an average only 30% make it from one stage to the next. Which means that if we start with 100 start-ups, only 1 will make it to the last stage.  The probability of becoming a Unicorn is a much smaller fraction and could even be counted as a random event. There could be a few more, which may operationally breakeven and continue their journey in a linear or flat manner. However, if you read stories of successful entrepreneurs, it will all look very natural and achievable.

The second aspect that entrepreneurial aspirants should vary of is the hindsight bias. There are innumerable stories on how to model oneself to be successful. Such stories exaggerate the success factors bordering on being prescriptive. Similarly, they exaggerate the factors for failures too, making it look as though they were so apparent. Such prescriptions are based on outcome (or hindsight) bias, wherein once something happens, it is very easy to see why it has always been so “predictable”.  It is simply a kind of creeping determinism wherein after the occurrence of the event, a mental substitution happens, due to which most of us are not able to recognise and believe that we thought differently before the event. Here again, it is the “system-1 thinking” that is working, wherein the world is presented to us as tidy, predictable, and coherent. The illusion that one understands the past leads us to believe that one can predict the future.

There simply are no cookie cutter approaches or prior models to becoming successful as an entrepreneur. Of course, there are models that work as a framework to structure your team, finances, operations, marketing, or product development and there are measures that can provide early guidance on how you are doing on each of these aspects and help in governance. These are well researched models and available to all who want to pursue entrepreneurship. But there are no unique or formulaic prescriptions.

A “founder” tag is coveted, and entrepreneurs are respected around the world. Highly successful amongst them have super star status and cult following. Wanting to be an entrepreneur is hence natural. However, taking the plunge should be a well thought out decision. A deep introspection on why one wants to start a company should be undertaken, preferably uninfluenced by the “motivating” stories. The journey is a very personal one, probably lonely and fraught with uncertainty. Glory comes only to the victors, the vanquished are forgotten, so mount the tiger carefully and only if you can unmount unhurt if the situation arises.