Cognitive Errors that Could Ruin Startups

It’s imperative that entrepreneurs frequently take a step back and reevaluate the driving forces behind the ideas, operations, and goals of their startup.

By Robert Carroll

I usually think of myself as a pretty smart guy, but then I meet some of the entrepreneurs leading startups in our region. Yet just as regularly as I overestimate my own intelligence, a significant number of entrepreneurs still unwittingly make mistakes while starting their companies. These small blunders can lead to grave disasters, often without anyone ever knowing what went wrong.

Cognitive errors are the great culprit in most startup disasters. These biases and fallacies creep into our daily decisions, and most of the time, pass unnoticed. Fortunately, these errors can be studied and avoided. The following are three of the most common cognitive errors made by entrepreneurs. If you overlook them, you risk falling prey to their illusion. Study them and arm yourself with a powerful ability to think clearly.

Survivorship Bias

The common view of entrepreneurship is very glamorous. There’s a never-ending barrage of movies, news, and books about the heroes of technology and startups. These well-known figures overcome all odds, make amusingly large fortunes, and obtain an untouchable status akin to that of the Dalai Lama. It seems like just the career path for you, right?

It’s easy to get caught up in successes all around you, because victory is much more visible than defeat. News anchors don’t report on the 90 percent of seed-stage startups that fail, or the 95 percent of restaurants that close within their first year of opening. Everyone likes a rags-to-riches story, so the media cherry-picks the few winners that have outdone the rest. In The Art of Thinking Clearly, author Rolf Dobelli accurately said: “Because triumph is made more visible than failure, you systematically overestimate your chances of succeeding.”

So before you jump head first into entrepreneurship, make sure you know what you’re getting yourself into. Most startups fail because there’s no market need for the product being offered. Finding a solution that people want to buy is much more difficult than we imagine. The next most popular reason why startups fail is because they run out of cash. Cash flow is terribly challenging to manage, especially in the ever-changing environment of a startup. Regardless of why startups fail, the message is clear: the odds are against you.

Confirmation Bias

Elon Musk is sending missions to space with his company Space X, and Richard Branson is already selling earth-orbiting tickets on Virgin Galactic flights. Everywhere you look, people are interested in space, especially millennials.

Consider a hypothetical startup that targets millennials and allows them to watch a live stream of Mars on their smartphone. Before you know it, you’ve spent millions of dollars to launch a satellite that orbits Mars. You release your smartphone app so people can watch live video of Mars, and then you sit back and wait for all the users to roll in. All of them, you suspect, will see your MarkaVIP ads and make you rich.

Of course, the venture flops and you’re millions of dollars in debt. How did this happen when all the trends were pointing towards Mars? It’s likely that they actually weren’t. As humans, we have an incredible ability to filter out all of the information that doesn’t line up with our existing beliefs. If we believe that the Mars app will make us millionaires, we find enough information to support that belief.

Countless startups have crashed and burned because of the confirmation bias. The way to avoid this cognitive error is to build a team of intelligent individuals who aren’t afraid to share their opinions. Make a conscious effort to understand your startup’s hypotheses and frequently set out to find disconfirming evidence.

Incentive Super-Response Tendency

The shocking history behind the Dead Sea Scrolls demonstrates the problem with poorly-designed incentive structures. When the parchments were discovered in our region in 1947, archaeologists offered cash rewards for each new artifact. Instead of search crews scouring the wilderness for more scrolls, people tore up the few scrolls they could find into several pieces. The damaged parchments were then exchanged for a lot more money.

Famed management theorist Peter Drucker said: “What gets measured, gets managed.” Think about that.

People act in their own best interest. The best way to get things done is to tie performance to compensation, but be ready to see people do whatever is possible to obtain that compensation.

In a recent Stanford University class on how to build a startup, entrepreneur and investor Sam Altman said: “It really is true that the company will build whatever the CEO decides to measure. If you’re building an Internet service, ignore things like total registrations—don’t talk about them, don’t let anyone in the company talk about them—and look at growth and active users, activity levels, cohort retention, revenue, and net promoter scores. These are the things that matter. And then be brutally honest if they’re not going in the right direction. Startups live on growth—it’s the indicator of a great product.”