Fintech

Beware the bias: How cognitive biases can affect both entrepreneurs and customers

Published on June 20th, 2019

Cognitive biases are thinking mechanisms that influence the way we make decisions. They are the brain’s way of simplifying the vast amount of information it’s constantly faced with processing. If you had to stop and assess every potential option available to you to process every single decision in your day, it would take you a very long time to make some simple decisions. So the brain takes a “mental shortcut”, relying on your past experiences, emotions and preferences to help you make sense of the world in a reasonably short space of time.

In some contexts, this can be very useful; for example, if you need to make a snap decision. If you see a snake while out on a walk, your brain will likely tell you to run because it’s been wired to perceive all snakes as dangerous. Your brain takes a mental shortcut and tells you to avoid the risk that it might pose a real threat at all by running for your life.

In others, and this is probably the most frequent outcome, it can lead to irrational decision making, especially if your decision requires accuracy and your cognitive bias results in you making a snap decision instead. This is when it can be harmful, particularly if you’re an entrepreneur who can’t afford to be making flawed judgements. Awareness of some of the common biases entrepreneurs can fall prey to, can help you minimise their effects and enable better decision-making.

Optimism bias

There’s no doubt that a healthy dose of optimism is necessary in the start-up world. But it can be problematic if you subconsciously believe that you’re more likely to be successful, or less likely to fail, than your peers for no objective reason other than your ingrained optimism. It may mean that you don’t undertake the proper research into developing your product because you are overly optimistic about its potential, believing it to be so different or valuable that it can’t possibly fail. This type of bias can lead to irrational and unrealistic judgements, as well as excessive risk-taking.

For example, a study on BP’s Deepwater Horizon disaster illustrates how a number of cognitive biases contributed to the human and environmental tragedy in April 2010. In particular, the author highlights how excessive optimism led to a “systematic underestimation of the probabilities of accidents” which in turn resulted in the company taking shortcuts, while its “dismissal of flagged process safety issues” is an example of confirmation bias (see below).

Confirmation bias

This is the tendency to only pay attention to information that confirms your existing views and ideas, disregarding anything that doesn’t match. Too narrow a focus can distort your view and make you vulnerable to missing relevant information that the brain has interpreted as too negative to take into account. Again, it can result in poor decision-making because you’re prioritising information that fits your bias rather than giving equal weight to all the information at your disposal, whether it supports your viewpoint or not.

Sticking with the BP example from above, the author illustrates how the company’s disregard of analysis warning about the stability of the oil well is an example of confirmation bias “because its output failed to support the adoption of a cheaper, more expeditious well design”. In other words, the author alleges that BP wanted to drill the well quickly and cheaply, and so ignored any information that wasn’t supportive of this goal.

Curse of knowledge

The curse of knowledge bias refers to the tendency of well-informed people to struggle to see the perspective of a less-informed person. As an entrepreneur, you’ll be the best informed person about the value of your offering and because you have so much implicit knowledge about its advantages, you may well inflate its price above what a customer with less of an understanding than you may be willing to pay.

In a similar vein, you may not be able to understand how a customer can’t navigate the app you built and complains of its complexity when to your mind you’ve created a simple and easy-to-navigate interface. The reality is that you may well have become so involved in its construction, that you’re unable to view it from the perspective of an outsider, who hasn’t been part of the creation. It’s not difficult to see how such a disconnect with your customers can be harmful to your success.

Find your challengers

There are a few things you can do to combat the effects of these biases. One of the best ways to do this is to discuss important decisions with a trusted, knowledgeable and objective third party; all the better if you can assign this person the role of “contrarian”. Their job would be to act as a devil’s advocate and point out potential pitfalls that your subconscious biases may be making you blind towards. It’s not about raining on your parade, but rather about making sure you’ve considered all angles before making your decision.

Similarly, fostering a culture that encourages productive challenging from team members will go a long way to helping you see things from a different perspective to your own. Promoting open communication channels in an environment where people are comfortable challenging one another will not only ensure you’re incorporating a diverse set of information sources into your decision, but also cultivate a feeling that everyone’s views are valued.

You could also try writing a “eulogy” for your business. The idea is that by reflecting on the ways in which you business could fail you force yourself to think about what could go wrong and how you can avoid these negative outcomes. By opening your mind to all possibilities, even the ones you don’t want to think about or that your brain wants you to ignore, you increase your chances of making a better decision. The other side of the coin: biases your customer could suffer from

It’s not only entrepreneurs who are susceptible to cognitive biases; customers are too. It is useful to consider other relevant biases that may affect your ability to effectively target your purchaser.

Familiarity bias

While familiarity may well breed contempt, it can also breed “content”. It’s very common for people to stick to what they know, rather than embrace something entirely new and unconventional. Take, for example, the slow rise to fame experienced by the smartphone. The first smartphone was not, as may commonly be believed, the iPhone but actually IBM’s Simon Personal Communicator, released in the early 1990s. It incorporated a number of apps and features that we’re familiar with today but it was too new, too soon. People weren’t used to the idea of a phone with computer capabilities and it didn’t exactly take off. Gradually, as companies like Nokia, Ericsson and Blackberry brought their smartphone devices to the market, people became more familiar with the concept, paving the way for the launch of Apple’s worldwide phenomenon: the iPhone. Had the product been introduced at the same time as IBM’s, it almost certainly wouldn’t have enjoyed the success it has today. Despite some of the benefits of familiarity, many entrepreneurs want to reinvent the wheel and introduce something completely off the wall. While there’s nothing wrong with either tendency, as an entrepreneur, you should be aware that many of your customers are likely to be drawn to, or feel more comfortable with, something that feels relatively familiar to them. This is particularly applicable during a digital user experience: not many people relish having to problem-solve their way through a confusing interface that takes up too much of their precious time. This isn’t to say that you shouldn’t develop something new, exciting and different; rather that incorporating some familiar elements in your innovation may help your customers engage with your offering easier or more effectively. Familiar icons, words or navigational flow could be useful tools to do this.

Availability heuristic

People are often influenced by their most recent, or most vivid, memories. Watching numerous documentaries on shark attacks, might make you believe that they’re more common than they really are, simply because they’ve been on your mind recently as a result of what’s been on TV. As an entrepreneur, you can use this to your advantage by making sure your brand or offering is in all the right places. If it’s something that your customers are being exposed to on a regular basis, the chances are that you’ll increase the likelihood that your brand, product or service is easily recallable during the customer decision-making process. Another way to use the availability heuristic is to promote your brand’s success on your landing page by making sure any accolades or supportive press releases are easily seen. Your page visitor’s brain automatically decides that this brand must be worthwhile engaging further with based on the most recently available information (which tells him/her how valued it is in the market place).

It’s also worth bearing in mind that as part of the availability heuristic, people tend to recall vivid, unusual or particularly interesting memories more easily than those that are less so. In fact, there are separate biases called the “bizarreness” and “humorous” effects that suggest people remember strange or funny material better. Taking these factors into consideration could help make you stand out from the crowd and improve your customers’ ability to recall your offering.

Nando’s often uses a shock factor in their advertising which makes it more memorable; by making controversial political statements, the firm ensures people talk about its brand even if the advert has only been aired for a short period.

Anchoring bias

As they say, first impressions last. The anchoring bias is about peopling tending to place more value on the first piece of information they receive and how this influences subsequent judgements. Once someone has formed an initial view of something (which can happen in a matter of seconds), it can be difficult for them to change this perspective. It’s therefore crucial that the first interaction your customers have with your brand is positive and effectively gets your message across.
De Beers used this bias to its advantage when it first introduced the idea that engagement rings should cost a month’s salary (a high anchor that aimed to encourage high spending). Although it was a somewhat arbitrary suggestion, people couldn’t help but be influenced by it and it began to be used as a starting point for people deciding on the budget for their ring purchase. The famous diamond behemoth did it again in the 1960s in America, changing the advice to two months’ salary and then to three months’ salary in Japan in the 1980s (a country which, at the time, didn’t follow the engagement ring custom). On all three occasions, anchoring worked to give people an indication of the “value” of a ring purchase upon which to base their decisions to the benefit of De Beers, which saw diamond sales increase nineteen-fold in the 40 years between 1939 and 1979.

Knowledge is power

This is in no way an exhaustive list of cognitive biases; there are hundreds of ways in which these thinking errors can affect you as an entrepreneur or your customer. Some of these can be constructive, depending on the context, but many of them can be detrimental particularly if they are based on faulty assumptions. Trying to identify and combat how your own biases influence your thinking, as well as considering those your customers may be susceptible to, is a useful exercise in awareness that can have a significant impact on the effectiveness of your decision-making and, ultimately, the success of your start-up.

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