innovation

Entrepreneurial decision-
makers and the use of biases
and heuristics

Objectives
• Examine negative biases that can
emerge in entrepreneurs and in
entrepreneurial teams
• Best practices for managing the
representativeness &
overconfidence

Entrepreneurs are more likely to use biases
and heuristics
• Why do entrepreneurs more so than company
managers use:
– personal judgment,
– cognitive mechanisms, and
– subjective opinions?

Benefits of using biases and heuristics?
• Working with incomplete data
• Need to make faster and cheaper decisions
– Less time spent = fewer opportunities missed
– Less money spent = need to efficiently manage limited
financial resources
• Need to take decisive action
– Capitalized on near-term opportunities
– Lessen likelihood of missing opportunities

Minimize the total time through the loop
The Lean Startup, Eric Ries

Dangers of using biases and heuristics?
• Hasty decisions
• Incomplete analysis
• Squander resources
• New biases

Negative biases that can emerge in
entrepreneurs and in entrepreneurial teams
• Representativeness
– Decision-making short cut by generalizing about
a person or an event based on only a few
attributes of that person or only a few
observations of similar events
• Overconfidence
– Decision-making bias of over optimism in an
initial solution and slowness to incorporate
additional information about a situation into the
solution because of initial confidence

Why are entrepreneurs subject to
“representativeness” heuristic?
• Not enough resources (time, money, knowledge, etc.)
to systematically collect data
• Not enough resources to analyze data
• Fear is missing opportunities
• Sense of urgency to make a decision

• Passion and belief that the favored outcome
is the likely outcome
• Overestimation of one’s own knowledge
may be necessary to pursue innovative,
uncertain opportunities
• If the entrepreneur is not confident, the
team, investors, etc. will not be confident
Why are entrepreneurs subject to
“overconfidence” bias?

Best practices for managing the
representativeness & overconfidence
• Actively search for information
• Define assumptions
• Consider alternatives
• Estimate the consequences
• Work as a team
• Ask for advice

Customer discovery and validation is central
to the decision to launch the firm.
The Lean Startup, Eric Ries

Summary
• Negative biases can emerge in
entrepreneurs and in entrepreneurial
teams
• Use best practices for managing
representativeness overconfidence
– Customer discovery and validation is
central to the decision to launch the firm

innovation

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