Beating cognitive bias
According to the Bureau of Labor Statistics, around half of startups fail within the first five years.
Many entrepreneurs cite things like lack of demand, financial instability and issues with scaling for their failure, but the real reason is often down to something called “cognitive bias”. We’re all guilty of it – we create our own realities based on our desires and act accordingly. Unsurprisingly, this is an incredibly dangerous thing to do, especially when you’re running a business. It’s been shown that entrepreneurs are more susceptible to certain cognitive biases than others (there are a range of them), although no one knows exactly why.
One of the most common cognitive biases is “overconfidence”. A lot of entrepreneurs like to think they can do everything themselves but nobody can! Although it might save some money, trying to do everything yourself simply leads to burnout or tasks being poorly executed. Entrepreneurs need to know their limitations if they want to succeed. Having an overconfidence bias can stop you from delegating which is vital for achieving more, so if this is something you suffer from take a step back and highlight the areas you struggle with and then hand these over to someone better suited – you only benefit from doing this!
Another cognitive bias is “optimism bias”. You probably know someone who believes nothing bad will ever happen to them: “The market has crashed? That won’t affect me! My business is ticking along nicely.” Although it’s helpful to focus on the positives, entrepreneurs need to be aware of the parts of their business that aren’t doing so well. The optimism bias chooses rose-tinted glasses over reality which leaves their business in a precarious position. These entrepreneurs need to accept that anyone can fail. No matter how smart they are or how stable their business seems, entrepreneurs should always be prepared for the worst.
So, you’ve started a business and it’s not working out but you’ve put years of your life and tons of your money and time into this thing – you can’t stop now, right? I understand how hard it can be to let something you care so much about go but sometimes you need to if you want to achieve success. “Sunk-cost fallacy” is the thinking process that you’ve come so far, you can’t quit now! A lot of entrepreneurs have this because it’s been drilled into them that hard work equals success but it’s just not true. By ploughing ahead with a failing business, you’re just wasting time and money. You need to accept that life doesn’t always go to plan and get out while you can. Don’t see this as a failure, see it as a learning opportunity so when you set up your next business you can avoid making the same mistakes.
In contrast, the “status quo bias” holds you back. This is an easy bias to have because it’s a natural response to uncertainty. We all fear the unknown and for entrepreneurs with this bias, it stops them from taking risks. Instead of pushing their business, they stay in the safe confines of the status quo, content but static. Their thought process that safety trumps risk means their business quickly goes stale and they completely lose sight of their goals. So, how can this be fixed? Entrepreneurs with this bias need to get over their fear of the unknown. Everyone likes to feel safe but sometimes you need to take a risk if you want to achieve your goals. The next time a risk arises, assess its positives and negatives and then act accordingly. Base your decision on facts, not fear – if it helps your business to expand or increase your profit and there’s little risk, then go for it!
Something a lot of leaders suffer from is “confirmation bias”. This is when you search for information that confirms your thoughts. We all like to be right but confirmation bias blinds us from the truth and only results in bad decisions being made. It’s vital when running a business to embrace criticisms – these help improve our processes, and as a result, productivity. When you surround yourself with “yes” people, you’re not helping your business achieve more, you’re simply inflating your ego. Cure your confirmation bias by inviting your team and others to challenge your views and decisions. By seeking outside perspectives, you’ll be able to make more well-informed decisions that not only aid your business, but keep your team engaged and feeling valued.
The final cognitive bias I want to cover is “planning fallacy”. Not everyone is a planner, but when you run a business you need to be! You should know exactly how much time you have to spend on a project and the extent of your resources. Entrepreneurs with planning fallacy constantly underestimate everything. Whether it’s time, resources or money, these entrepreneurs often work late into the night or at weekends because they haven’t planned properly. Although the work might get done, its lateness and the energy it takes to do soon puts both your reputation and your health at risk. As expected, the fix for this one is pretty obvious – plan! Every day of your life as an entrepreneur should be planned out. Your time is incredibly precious and if you want to achieve more, you need to spend it on the right things. As well as planning, you should also always have a plan B in place. Even if you meticulously plan a project, external obstacles can quickly crop up which demand your time. Be prepared for these by keeping your Assistant in the loop and delegating smaller tasks to them to keep you on track and stop you from missing a deadline.
If you know you suffer from any of these cognitive biases then don’t worry! It doesn’t mean your business is doomed to fail. Take on board the advice detailed above and start challenging your biases. The more you do this, the quicker you’ll be able to alter your mindset and make better decisions for your business.