“The Battle Within: Cognitive Biases and the Struggle for Sound Entrepreneurial Decision-Making”: Dr. Vimal Babu, Associate Professor – HR & OB,SRM University -AP


Entrepreneurial Biases by Design.
Every individual has a bias towards something or someone. Entrepreneurs too are affected by biases. When faced with adversity, an entrepreneur’s ability to make sound decisions can be severely hampered by cognitive biases. If entrepreneurs don’t recognise or work to overcome these biases, they may make poor decisions that hurt their startup ventures. This article explores how entrepreneurs’ cognitive biases affect their judgement and decision-making in trying economic times. To substantiate what is being argued, I have included four real-life examples of prominent global enterprises. These global enterprises suffered economically. And one of the major reasons for such a lacklustre performance eventually by these enterprises was the poor understanding of the role of cognitive biases in one’s ability to take decisions pertaining to an enterprise.

Overconfidence Bias: The overconfidence bias occurs when an entrepreneur overestimates his or her own abilities and the likelihood of success for their startup.

Snippet 1: One company whose founder, Elizabeth Holmes, shows how overconfidence may backfire is Theranos. She was committed to her mission of transforming medical care through a revolutionary blood-testing technology. Her stubborn optimism in the face of formidable technological obstacles ultimately doomed the company to a downward spiral of mistakes.

Confirmation bias: Bias towards accepting information that confirms one’s previous ideas and rejecting information that does not fit those assumptions is an example of confirmation bias. Because of this prejudice, they are unable to assess risks rationally or consider other points of view.

Snippet 2: Let’s look at Blockbuster to see how confirmation bias may have contributed to the company’s inability to respond to the shifting video rental market. The corporation stubbornly stuck to its opinion that the conventional video rental model was superior, despite the growth of online streaming and the decline of in-store rentals. This myopic view was the primary cause of Blockbuster’s collapse.

Anchoring bias: When founders make decisions based on the first information or reference points they encounter, this is an example of anchoring bias.

Snippet 3: Kodak. Anchoring bias explains why the company was slow to adopt digital photography. We know that the company was already able to innovate the digital camera technology in the early years of 1970s. However, the decision-makers of the firm decided to mint a lot of money out of the existing profitable film business. As they were too much engrossed in the film business, they overlooked the meteoric rise of digital photography and failed to observe the change preference of the customers. Thus, Kodak ended up with huge financial losses due to increasing competition and shrinking market share over a period.

Loss aversion bias: Overly cautious decision-making and missed possibilities for growth are the results of the loss aversion bias that encourages entrepreneur to put off taking risks in favour of avoiding losses.

Snippet 4: A former industry leader, Nokia, saw a dramatic decline after being affected by loss aversion bias. Fearing the loss of its profitable feature phone business, the corporation was slow to embrace the transition towards smartphones. Nokia’s mobile phone division was sold off because of its declining market share and the company’s inability to adapt to the rising demand for smartphones.

Availability bias: Bias due to over-reliance on easily accessible information, especially recent or vivid examples, can affect entrepreneurs’’ assessment of dangers and possibilities.

Snippet 5: In the case of MySpace, availability bias may have contributed to the site’s eventual demise. The establishment was unprepared for Facebook’s meteoric ascent to the top of the social media food chain. MySpace was so focused on its first success that it failed to notice Facebook’s rapid expansion and excellent user experience. Because of this prejudice, MySpace was unable to evolve with the times.

Cognitive biases can seriously impede an entrepreneur’s decision-making amid trying times, putting the future of their firm at risk. Biases such as overconfidence, confirmation, anchoring, loss aversion, and availability can mislead entrepreneurs and impede them from making objective risk assessments, responding quickly to market shifts, and grabbing advantageous chances.

Can we lessen the effects of cognitive biases? Implementation matters!
Effective implementation is the key to mitigate biases in the decision-making process pertaining to entrepreneurship. An entrepreneur can implement some of the tactics and practises to lessen the effects of cognitive biases in one’s entrepreneurial journey:

Awareness and Education. The existence and impact of cognitive biases should not be ignored, and entrepreneurs should be educated on the topic. Entrepreneurs can actively challenge their beliefs and choices by learning about these biases and their possible effects.

Diverse perspectives. Promoting a diverse workforce and actively seeking out alternative points of view can aid in the fight against confirmation bias. Entrepreneurs may avoid the pitfalls of confirmation bias and make better judgements by keeping an open mind and welcoming constructive feedback.

Data-driven decision-making. To avoid cognitive biases like availability bias and anchoring prejudice, data-driven decision making promotes. Entrepreneurs can better analyse risks and possibilities when they are based on empirical evidence and consider a variety of data sources.

Embrace failure and learn. Entrepreneurs should take setbacks in business less personally and more as opportunities to grow and improve. Loss aversion bias can be overcome, and reasonable risks can be taken if entrepreneurs embrace a growth mentality and view setbacks as learning opportunities.

Seek external feedback. Seek Advice from Others: Mentors, advisors, and professionals in your field can all provide insightful feedback. Entrepreneurs can benefit from the assistance of these people because they will be able to question their own assumptions, recognise their own prejudices, and make more unbiased choices.

In sum, cognitive biases are serious obstacles for entrepreneurs to overcome when making decisions, especially in trying economic conditions. An entrepreneur takes risks, initiative, motives and lead other team members and most importantly, ownership. To generate more impact on entrepreneurial decisions and outcomes, an entrepreneur is required to understand
and be aware of the existence of cognitive biases. Moreover, implementation of certain tactics and practices must be adopted by an entrepreneur as counter action. Big global brands, such as Theranos, Kodak, Nokia, Blockbuster and MySpace present their failures as evidence to caution the entrepreneurs to be mindful of their individual cognitive biases.

Ultimately, entrepreneurs may improve their decision-making skills and the likelihood of success despite hardship by working on self-awareness, seeking varied perspectives, depending on data, embracing failure, and seeking external criticism. This will lead to a significant change in the perspectives of an entrepreneur, in turn, mitigating profoundly the influence of cognitive biases in the entrepreneurial decision-making.

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