Wednesday, March 26, 2008

POTW: The Psychology of Entrepreneurial Misjudgment

The Great Andreessen is at it again, tendering our post of the week: The Psychology of Entrepreneurial Misjudgment. Therein he adapts, for entrepreneurs, 25 biases identified by Charlie Munger, Warren Buffett's long-time partner and Vice-Chairman at Berkshire Hathaway. They're (we're) singing our (their) song. It's a worthy and meaty read ... take 10 minutes to dig in. In the interim, here's a digest of the biases posted by Venture Hacks:

1. Reward and Punishment Super-Response

Once you realize how much incentives influence human behavior, you need to assume their influence is even bigger than you think. Never think about something else when you should be thinking about incentives. Benjamin Franklin: “If you would persuade, appeal to interest and not to reason.”

2. Liking and Loving
Liking and loving something conditions you to (1) ignore faults of and comply with wishes of the loved, (2) favor people, products, and actions associated with the loved, and (3) distort other facts to facilitate love. Wanting to be liked by your teammates impedes you from firing people and making unpopular but good decisions.

3. Disliking and Hating

Disliking or hating something conditions you to (1) ignore virtues in the disliked, (2) dislike people, products, and actions associated with the disliked, and (3) distort other facts to facilitate hatred. Startups should focus on their customers, not their competition—whom they may dislike.

4. Doubt Avoidance

Execution is often better than further contemplation. George Patton: “A good plan, violently executed now, is better than a perfect plan next week.” Believing that something will happen, and convincing others that it will be so, makes it more likely to happen.

5. Inconsistency Avoidance

Have strong opinions, weakly held. New and correct ideas may not be accepted simply because they are inconsistent with existing ideas. Your existing ideas may be unknown to you. They may be hidden assumptions. We often make hidden assumptions about unknown unknowns. If existing customers in the market aren’t ready for a product that is inconsistent with their behavior, go after customers who aren’t in the market because they can’t afford the existing product or don’t have access to it.

6. Curiosity
Insufficient curiousity prevents you from learning. Hire curious people and discover your customer’s true needs—not what you think they need.

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