Cognitive mechanisms in entrepreneurship

Purpose

Human cognition research suggests that we are not a totally rational species: Thinking errors and biases are part of the human condition. Baron’s 1998 article explores how entrepreneurs think differently from non-entrepreneurs and how these differences could lead to an increased susceptibility to certain thinking errors and biases. He then examines five specific thinking errors and their relevance to entrepreneurs.

Research

The author presents a literature review of the human cognition and entrepreneurship fields and then attempts to build additional conceptual links differentiating how, and under what circumstances, entrepreneurs think differently from non-entrepreneurs. “A number of such links are identified, and for each, the process or mechanism in question is first described, followed by an explanation of its potential relevance to entrepreneurship.”

Summary

Important insights into such questions as “Why do some people recognize opportunities whereas others do not?” and “Why do some try to develop such opportunities whereas others do not?” may be gained through careful study of the ways in which entrepreneurs and other persons think—how, in the terms of cognitive psychology, they attempt to make sense of the complex world around them.

Thirty years of entrepreneurial research concludes personality traits don’t necessarily predict entrepreneurial success, according to the author.

Entrepreneurs are different from other people, not because of personality traits but because entrepreneurs find themselves in situations naturally leading to higher incidences of thinking errors and biases. Cognition errors commonly occur when

• “overload occurs—individuals are confronted with more information than they can process at a given time”;
• “individuals face situations that are new to them and involve high degrees of uncertainty—situations in which they cannot readily fall back upon existing mental frameworks”;
• “emotions run high—there is a complex interplay between feelings and thought, and intense emotions can produce distortions in many aspects of cognition”; and,
• “individuals face high time pressures and are in a less-than-optimal physical state; time pressures increase the tendency to adopt mental short-cuts, and factors such as physical fatigue or stress exert similar pressures.”

Because entrepreneurs more often find themselves in taxing situations compared to non-entrepreneurs, their cognition is frequently more susceptible to biases and other thinking errors. Consider the following five errors that may particularly affect entrepreneurs.

Figure 1. Factors influencing cognitive errors (adapted from Baron 1998).

Cognitive errors common in entrepreneurs

Counterfactual thinking

From time to time, everyone thinks about “what might have been,” imagining what would have happened in specific situations if they had acted differently.

Recall past arguments where the quick-witted comeback only came to you after the fact. You repeatedly replay the scene in your head (recall Seinfeld’s “The Comeback” episode with the classic line, “. . . the jerk store called . . .”). Or, times when you had a choice, made it, and then post hoc repeatedly analyzed the decision. This is “counterfactual thinking.” Research suggests that it is far more than an overactive imagination. These thoughts of “what might have been” affect your emotional state, conclusions you draw, decisions you make.

They also cause regret.

The author hypothesizes the regret felt by entrepreneurs is particularly intense when it relates to their past failures to act—for instance, failure to pursue a particular business opportunity or hire a particular job candidate. Therefore, entrepreneurs may be more prone to seek out, identify, and pursue perceived opportunities to avoid feelings of intense regret.

Affect infusion

Existing evidence indicates that [emotions] can be quite significant. Indeed, current moods have been found to influence even such important processes as evaluations of applicants during job interviews . . . and jurors’ judgments about guilt or innocence.

It is clear that moods or feelings influence thoughts. A theory known as the “affect infusion model” (AIM) focuses on how moods or feelings about one subject or experience can influence (or infuse) judgments about unrelated events.

AIM suggests moods and feelings act as a heuristic¹ affecting reactions to people and events. If someone has to make a decision, they are likely to subconsciously examine their own feelings about the thing in question and pass judgment by determining if they either do or don’t like that thing. This is fine if their feelings are actually caused by the object or issue in question. AIM suggests, though, that distortion may occur when those feelings were not generated by the object or issue under examination, but instead by something else unrelated in the decision maker’s life, such as a fight with a spouse (negative) or a pleasant comment that was received (positive).

AIM also suggests that, paradoxically, the more individuals care about the decisions they make and the more careful and reasoned their decision-making approach, the more likely affect infusion will occur.

The author hypothesizes that entrepreneurs are more susceptible to letting their emotions sway their decisions because their commitment to their work causes strong levels of emotions and because the nature of their work often requires novel or creative decision-making.

Attributional style

“Attribution” is the term that social psychologists use to describe the human need to have an answer for why things happen. This is a normal behavior and is usually orderly and rational: People attempt to understand the cause and effect relationships around them.

However, even the rational process of attribution can be the source of biases and thinking errors. The self-serving bias can particularly affect entrepreneurs; it causes people to attribute positive outcomes to their own internal qualities or attributes, such as skill, talent, good judgment, etc. It also causes people to attribute negative outcomes to external causes, such as others’ actions, malfunctions, bad luck, etc.

The author hypothesizes that entrepreneurs are more susceptible to the self-serving bias than others because entrepreneurs’ self-confidence and belief in their own abilities lead them to even more strongly embrace their successes and explain away their failures.

(The author notes, though, the most successful entrepreneurs are less susceptible to this bias, because over time they’ve learned to appreciate other people’s contributions to their success.)

The planning fallacy

Entrepreneurs and others often take actions or adopt strategies involving very high levels of risk because, in reality, they don’t truly recognize or accept these risks.

Why do entrepreneurs seem to ignore risks that others see as obvious? Entrepreneurs often ignore their past results and experiences–experiences that could dissuade them from taking action–and instead, act on a just a vision and plan for the future, which almost always is overly optimistic. In other words, entrepreneurs are future-focused.

[The planning fallacy is] the general tendency of all persons, not simply entrepreneurs, to overestimate how much they can accomplish . . . [or] to underestimate how long it will take them to complete a specific project.

Entrepreneurs often face unique situations filled with uncertainty—situations that cause them to “make it up as they go along” because relevant past experiences simply don’t exist.

The author hypothesizes that entrepreneurs are more susceptible to the planning fallacy than others and this contributes to their overly confident future projections and estimates.

Self-justification and the escalation of commitment

The Take-Away

You may have noticed in the preceding summary the author doesn’t offer up any hard conclusions, only a handful of untested hypotheses that point to various thinking errors an entrepreneur may be more susceptible to than others. Why did I decide that this paper is “interesting, influential or useful?”

There’s been a long-standing debate in the investor community whether it’s better to bet on the “jockey or the horse.” In other words, when considering new investments, should an investor be concerned more with the quality of the founders or the potential of the business idea? The debate has arguably been decided in favor of founders.² A good idea driven by a weak team will not likely succeed; however, a strong founding team often pivots from bad idea to good, eventually finding success.

What describes a good founder? Good decisions. This article provides part of the roadmap to becoming a better founder—i.e., a better jockey—by improving decision-making ability via

• minimizing thinking errors and biases,
• avoiding logical fallacies,³ and
• using a framework to provide structure to important decisions about your business.

Baron’s article discusses real cognitive errors we make over and over again. Only further research will reveal whether entrepreneurs are indeed more susceptible to these thinking errors. Regardless, unless you are Vulcan, awareness of these traps will help you avoid them in your future decision-making.

1. A heuristic is just a convenient rule of thumb or cognitive short-cut.
2. This Venture Beat blog post helps illustrate why investors are leaning more toward the importance of the founding team.
3. For instance, List of Fallacies.