My finances, my projects, my life
July 17, 2024

Entrepreneurs are emotional beings

  Compiled by myLIFE team myCOMPANY October 31, 2022 732

Behavioural research offers some interesting approaches

Good ideas, an ingenious business plan and the right partners are of course essential but are not enough to ensure the success and survival of a company. Success does not depend solely on rational elements, but also on decisions. And these are systematically influenced by emotions and cognitive biases. The key is to understand those factors that may lead to the wrong conclusions. These factors are referred to as cognitive biases in behavioural research. Once we are aware of these biases, we can use them to our own advantage – without risk appetite there would no innovation.

Overconfidence can be a danger

Without a doubt, overconfidence can be the most important cognitive bias that we need to keep in check. The feeling that we are infallible can damage our judgement and our ability to handle certain situations. When entrepreneurs are faced with difficult tasks, there is frequently a mismatch between objective reality and their trust in their own judgement. We must learn to recognise our own limits and to admit that we do not have all the skills and knowledge required to manage every challenge on our own.

Unrealistic optimism is also a classic issue for entrepreneurs, particularly if they are already prone to overconfidence. This can lead them to rely solely on their instincts when taking decisions and to disregard the facts. This may mean that they take excessive risks when making decisions. As an entrepreneur, you should hope for the best and prepare for the worst, which means including all relevant factors in the decision-making process. This includes worst-case scenarios.

Entrepreneurs who are overconfident also tend to see confirmation of their own ideas when looking for or interpreting information. This makes them blind to arguments that call their own standpoint and judgement into question. Confirmation bias can lead us to key ignore important figures or information that could be decisive for the company. As such, we shouldn’t give our own opinions greater weight than facts. As entrepreneurs or company founders, we must learn to accept criticism and bad news, and use them wisely. This also applies to critical opinions.

The key is to understand those factors that may lead to the wrong conclusions.

Things don’t always go to plan

Overly ambitious deadlines can also be dangerous. Many entrepreneurs underestimate how much time and resources will be required to realise their projects. This can result in planning errors – often linked to excessive optimism – and this can be fatal for a company, as frequently there is no backup plan. To avoid this, we must learn to accept that things don’t always go to plan in the world of entrepreneurs. Considering the potential risks and having a proper backup plan are both essential elements in a successful entrepreneur’s playbook. Even if getting everything done as quickly as possible is important, realistic deadlines help us to achieve our goals.

The sunk-cost cognitive bias describes the tendency to continue with a project at all costs, on the pretext that you have already invested a lot of time, work or money in it – irrespective of whether the expected results will cover the actual outlay or not. Sticking to a project at all costs can quickly lead to a dead end and endanger the company. When company founders doggedly pursue the wrong course of action, they invest time and money in projects that are already a lost cause. So it is key to determine whether investments are worthwhile, even during the implementation phase of a project.

Entrepreneurs may be unable to take decisions or act if they are overwhelmed by the range of alternatives, the complexity of decisions, or an extremely uncertain environment. Yet there is a high risk involved in always seeking to preserve the status quo. The biggest danger here is missing out on important opportunities. This applies most of all when investing.

Debiasing techniques

There is a whole range of debiasing techniques to prevent cognitive biases taking over. These can be built into decision-taking processes. Here are three possible suggestions:

    • At a certain moment in the process, play devil’s advocate and deliberately focus on arguments against a recommendation, thus exposing its weaknesses.
    • Hold a pre-mortem meeting, which means pretending that an imminent decision has been a failure and looking for the reasons for this failure.
    • Take a two-team approach, with two teams working independently of each other on the same task and then comparing their results.