10 cognitive biases that affect your everyday decision-making as an entrepreneur
When you run a business, it’s better to be utmostly conscious about just everything—and mind just any danger. One wrong choice and you lose your company. The stakes are high.
Bad news: we all have blind spots as most of our thoughts and beliefs are heavily influenced by cognitive biases or mental filters through which we see the world. But there is good news, too. First, you can remind yourself of the fact that you have a cognitive filter that influences your thinking—and apply a critical approach. Second, you can use this to make people like your product even more (which we’ll elaborate on later).
In this article, we’re going to focus on 10 of the most common cognitive biases to explain how they might demonstrate themselves in the entrepreneurial world.
1. Confirmation bias
Confirmation bias is a cognitive bias that is all about seeking out information that confirms our pre-existing beliefs, all while ignoring information that contradicts them. It can lead to flawed decision-making, as it can cause people to overestimate the accuracy of their ideas and fail to update them in response to new evidence. This bias can be particularly problematic when there is a lot of uncertainty or ambiguity, as people tend to selectively attend to points that confirm their thoughts—and overlook information that challenges them.
How the confirmation bias works
An example of anchoring bias in business is when a company negotiates a contract with a supplier. If the supplier makes an initial high demand for pricing, the company might anchor to that high number and then make an offer that is not as advantageous as it could be. Conversely, if the supplier makes an initial low demand for pricing, the company might anchor to that low number and fail to negotiate for a better deal, potentially overpaying for the product or service.
How to bypass the confirmation bias
Make more informed decisions by seeking out diverse perspectives, challenging assumptions, and relying on data and evidence. It’s important to remain open-minded and objective, and ensure that decisions are based on the most accurate and relevant information available.
2. Anchoring bias
Anchoring bias is a cognitive bias that refers to the tendency to rely too heavily on the first piece of information we receive when making decisions. This initial information, or “anchor,” can influence our subsequent judgments, even if it is irrelevant or unreliable.
How the anchoring bias works
Let’s imagine a negotiation where one party makes an initial offer that is significantly higher or lower than what the other party was expecting. The initial offer sets an anchor that can influence subsequent negotiations, as both parties may be more likely to adjust their positions based on the initial offer rather than independently evaluating the true value of the item or service being negotiated.
How to bypass the anchoring bias
Gather as much relevant information as possible before judging anything. Try to identify—and challenge—any initial assumptions that may be influencing your decision-making. Consider multiple potential reference points, rather than relying solely on the first piece of information received. Also, use decision-making frameworks or models that can help reduce the influence of biases and ensure that decisions are made based on relevant criteria.
Visualizing assumptions can be a great approach here. Create a mindmap of your ideas and see what it relates to and what concepts it might generate.
Create a mindmap on your own or collaborate on it with your team using VistaCreate:
3. Sunk cost fallacy
When you want to continue investing in a project or decision because of the resources that have already been invested (even if it does not make logical or financial sense), know that it’s the sunk cost fallacy cognitive bias at work. In other words, it’s the belief that because you have already invested time, money, or effort into a project, you should continue investing in it to justify the initial steps.
How the sunk cost bias works
A company invests heavily in a product development project that is not showing positive results or feedback from the market. Despite mounting evidence that the project is not going to be successful, the company may continue to invest time and resources because they have already invested so much in it.
How to bypass the sunk cost bias
Focus on the future potential of the investment rather than past investments that have already been made. Always ask questions like “If I had no prior investment in this project, would I still invest in it now?” and “What is the potential return on investment for the remaining investment required?” Also, regularly assess the viability and profitability of ongoing projects and be willing to cut losses if a project is no longer viable or profitable.
4. Bandwagon effect
The bandwagon effect occurs when people adopt a particular behavior because they see others doing it, rather than based on their own independent evaluation. It’s the belief that because something is popular or widely accepted, it must be the right thing to do.
How the bandwagon bias works
Take any company that decides to invest heavily in a particular social media platform simply because it has become popular—without considering whether the platform is the best fit for their target audience or business goals. This can happen when a platform receives a lot of attention or buzz, and companies feel pressure to join in to avoid being left behind.
How to bypass the bandwagon bias
Start taking a strategic, data-driven approach—evaluate decisions based on your business goals, target audience, and available evidence. Instead of blindly following the crowd, conduct research and gather data to inform decision-making. For instance, in the case of marketing channels, it may be helpful to conduct A/B testing to determine which ad formats are most effective in reaching your target audience.
You can always create multiple sets of creative graphics to test your marketing hypothesis. In VistaCreate, it’s also easy to adapt a chosen design to various formats to test them later. Watch this video on how it’s done:
5. Hindsight bias
Hindsight bias, also known as the “I-knew-it-all-along” phenomenon, refers to our tendency to believe that we knew the outcome all along, even if we had no real basis for predicting it. In other words, we tend to view events as more predictable than they actually are after they’ve already happened.
How the hindsight bias works
An example of hindsight bias in business would be a company that had a successful product launch and knew all along that the product would be a hit. In reality, the success of the product may have been due to a variety of factors, including luck and timing, that were difficult to predict beforehand.
How to bypass the hindsight bias
Document and analyze the reasoning and decision-making process that led to a particular outcome—both before and after the fact. This can help to identify the errors in judgment that may have contributed to the outcome. It is also important to seek input from multiple perspectives and consider alternative scenarios before a decision is made, rather than simply assuming that a particular outcome is inevitable after the fact.
6. Framing effect
The framing effect refers to how people’s decisions are influenced depending on the options that are presented to them. Specifically, people tend to make different decisions depending on how the options are framed, even if the underlying information is the same.
How the framing bias works
For example, an entrepreneur may be presented with the option of investing in a new technology platform, which could be framed either as a “high-risk/high-reward” opportunity or a “safe investment with potential growth.” Depending on how the option is framed, the entrepreneur may make a different decision, even if the underlying information about the investment is the same.
How to bypass the framing bias
Approach decisions with a clear and objective mindset—seek out diverse perspectives and gather as much information as possible before making a decision. Additionally, it can be helpful to take a step back and consider alternative frames for the problem at hand, as well as how different frames might influence the decision-making process. Rely on data-driven approaches and avoid being swayed by emotional reactions.
7. Halo effect
The halo effect refers to how one’s overall impression of a person, product, or company influences their evaluations of their specific traits or qualities. In the context of entrepreneurship, the halo effect can impact how an entrepreneur perceives and evaluates potential business partners, investors, or opportunities.
How the halo effect bias works
For example, an entrepreneur may be impressed by a potential partner’s previous business successes and may assume that they will also be great in this new venture. This can lead to the entrepreneur overlooking potential red flags that may indicate the partner is not a good fit. Similarly, an entrepreneur may be more likely to invest in a company or product based on its association with a reputable brand, without thoroughly evaluating its specific merits.
How to bypass the halo effect bias
Approach evaluations and decisions with a critical mindset: conduct thorough research, analyze potential partners or opportunities, and seek out diverse perspectives on their strengths and weaknesses. Additionally, it can be helpful to focus on specific, measurable criteria for evaluation, rather than being swayed by overall impressions.
8. Dunning-Kruger effect
The Dunning-Kruger effect is all about the tendency for people with low ability or expertise to overestimate their abilities and vice versa. This bias was identified in a study by social psychologists David Dunning and Justin Kruger in 1999—and it turned out that the bias has significant implications in various areas of life, including work, education, and personal relationships.
How the Dunning-Kruger bias works
For example, an entrepreneur who is new to the industry may overestimate their power to develop a marketing strategy, leading them to make costly mistakes or overlook important aspects of the strategy. Conversely, an entrepreneur who has significant experience in the industry may underestimate their ability to come up with new ideas, leading them to overlook potential opportunities for growth.
How to bypass the Dunning-Kruger bias
It is good to approach decision-making with a realistic and humble mindset, and seek out feedback and input from others, especially those who have more experience in an area of expertise. Additionally, it can be helpful to stay grounded in self-assessment rather than assuming you have mastered all aspects of the business.
To stay aware of what you really know and what you don’t know, try to reflect on your learning process—note what business approaches and models you know, what you want to explore in the coming months, and what your weak points are. You can also present summaries of your thoughts and insights through graphics—use templates from VistaCreate to make your insights noticeable and share them on social media.
9. Availability heuristic
The availability heuristic is a cognitive bias where people rely on the most readily available information—things that are on the top of their mind—to make decisions or judgments and avoid considering all available information. This can lead to inaccurate judgments, as information that is more readily available is not necessarily more accurate.
How the availability heuristic works
An example of the availability heuristic in entrepreneurship would be an entrepreneur who decides not to pursue a particular business idea because they can easily recall multiple examples of other businesses failing in the same industry. They may assume that the likelihood of their own business succeeding is low because of these easily accessible examples, even if there are many successful businesses in the same industry.
How to bypass the availability heuristic
Consciously seek out and consider objective information and data, even if it may not be as readily available or memorable. Conduct thorough analysis before making any decision, and don’t rely solely on anecdotal or readily available data. Also, seek out diverse perspectives to avoid being overly influenced by a single point of view.
10. False uniqueness bias
False uniqueness bias makes people overestimate the extent to which their abilities, characteristics, or behaviors are unique compared to others. This bias can lead entrepreneurs to believe that their products or services are more unique and special than they actually are, which can lead to overconfidence and a failure to accurately assess the competitive landscape.
How the false uniqueness works
For instance, a tech startup that offers a new type of app may believe that their product is completely unique and has no direct competitors. However, they may fail to recognize that there are other companies that offer similar solutions or that there are other indirect competitors that get the attention of their target audience. As a result, the startup may not invest in competitive analysis or market research and may struggle to gain traction.
How to bypass the false uniqueness bias
Strive to remain humble and open to feedback and constructive criticism—conduct market research and gather feedback from your target audience to gain a better understanding of their needs. It could also be great to study competitors’ unique value propositions to later identify gaps in the market and spot potential areas for collaboration.
The unbiased outcome
We can’t beat nature. Cognitive biases are inherent in how our brains process information, so they cannot be completely eliminated. There is no foolproof method to completely avoid cognitive biases, but there are some strategies you can use to help minimize their impact on your decision-making.
These approaches are simple. Try to actively seek out and consider alternative perspectives and information—intentionally look for viewpoints that counteract your assumptions and source feedback from diverse sources. Also, regularly reflect on your thought processes, questioning everything that may influence your choices.
So, every time you generate an idea, think about investing, or want to launch a new product, check to see if your decisions are free of cognitive biases. If you indicate some—it’s ok, just try to mitigate their impact by switching to rational thinking and double-checking your ideas with your team. It’s natural to have cognitive biases, but it’s dangerous to let them rule if you’re an entrepreneur that needs to mind your risks.