{"id":3030,"date":"2020-06-26T14:37:50","date_gmt":"2020-06-26T14:37:50","guid":{"rendered":"https:\/\/thefinanceghost.com\/?p=3030"},"modified":"2020-06-26T14:37:50","modified_gmt":"2020-06-26T14:37:50","slug":"whos-afraid-of-the-big-bad-bias","status":"publish","type":"post","link":"https:\/\/thefinanceghost.com\/index.php\/2020\/06\/26\/whos-afraid-of-the-big-bad-bias\/","title":{"rendered":"Who’s afraid of the Big Bad Bias?"},"content":{"rendered":"

H<\/span>umans are a weird bunch. We oscillate between rationality and irrationality. We develop probability theories and then we don\u2019t use them.<\/p>\n

We do odd things like differentiate between \u201cfun money\u201d and savings, as though there are two types of money in this world. We spend differently depending on where the money came from, even though money is perfectly fungible.<\/p>\n

We are weird, but we are fascinating.<\/p>\n

We use heuristic techniques all the time. That\u2019s just a fancy description for a rule of thumb \u2013 the good old 80\/20 principle that allows us to function in a world of imperfect data and at times unbearable time pressures.<\/p>\n

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These quick decisions are fraught with cognitive biases.<\/p>\n

Why is something that you built yourself always more valuable to you than something that you bought for the same monetary value?<\/p>\n

Why do people say \u201cwell, we\u2019ve come this far\u201d when making a decision, implying that the thought of wasted effort is more painful than the reality of making the wrong choice?<\/p>\n

Have you ever given a quick answer under pressure and then found it incredibly difficult to materially budge people from that number, even though you can clearly show that it was wrong?<\/p>\n

How often do startups describe themselves as \u201cthe Uber of this\u201d or \u201cthe AirBnB of that\u201d? It\u2019s so much easier than trying to explain the concept of these businesses from scratch. It\u2019s a sensible approach because we have a cognitive bias towards things that are familiar to us. It feels less risky somehow. It also feels like the success of the familiar concept may be repeated in the new concept.<\/p>\n

To pretend that these things can be entirely overcome would be to deny our psychology as humans. There\u2019s no getting away from it: cognitive biases are here to stay.<\/p>\n

You can\u2019t avoid cognitive biases, but you can catch them<\/h4>\n

Optimism, at its core, is a cognitive bias.<\/p>\n

\u201cThis time, it will be different.\u201d<\/p>\n

\u201cIt won\u2019t happen to me, I\u2019ve got this.\u201d<\/p>\n

It\u2019s also the core ingredient to any entrepreneur\u2019s success. That\u2019s why you can\u2019t avoid the bias, but you can catch it.<\/p>\n

You need to be optimistic, but you need to challenge your own assumptions. Think of as many reasons as possible why this idea might fail and what you can do to mitigate the risks. Build the best financial model you can, even if it is simplistic, to test things like break-even point and sensitivities to things not going as planned.<\/p>\n

It\u2019s tough to walk away, but it feels better to pivot<\/h4>\n

By the time you\u2019ve invested many hours in a project and probably some capital, the last thing you want to do is acknowledge that it\u2019s not going to work. You\u2019ve become emotionally invested in this idea.<\/p>\n

It\u2019s \u201cyour baby\u201d, right?<\/p>\n

The concept of sunk costs is easy to explain but far more challenging to apply. To make it slightly more enjoyable, let\u2019s relate it back to a movie we all know and love. \u201cHakuna Matata\u201d was an important part of The Lion King. It\u2019s in the past, so it doesn\u2019t matter.<\/p>\n

The decision to walk away or pivot should always be forward-looking. A useful technique is to introduce go\/no-go milestones into a project. Lift your head at agreed intervals and assess whether you should still be going down this path.<\/p>\n

Of course, a pivot means that some of your hard work might be salvageable, which will be an easier pill to swallow than completely giving up. That doesn\u2019t always make it the right decision, though. Sometimes you genuinely need to walk away.<\/p>\n

Be careful of finding what you\u2019re looking for<\/h4>\n

You want to buy a new family car. After researching it for a few days, you\u2019ve settled on a specific Mercedes-Benz. On your commute the next day, you start noticing them everywhere!<\/p>\n

\u201cIt\u2019s amazing how many of them are on the road. Clearly a popular car, we\u2019ve made the right choice,\u201d you proudly tell your significant other that evening. Of course, had you chosen the BMW instead, you would\u2019ve noticed just as many on the road that day.<\/p>\n

Confirmation bias is perhaps most dangerous of all. We love finding ways to prove we were right; to confirm our pre-existing beliefs. If you\u2019re looking for something, you\u2019ll usually find it. The problem is that you can easily become blind to the reality, while you blissfully carve out a convenient truth and latch onto it.<\/p>\n

Get a mentor or hire a team of thinkers<\/h4>\n

If you simply want to hire another pair of hands that will do exactly as you say, then add another yes-man to your team. These people never criticise or question their superiors, either because it isn\u2019t in their natures or because they aren\u2019t knowledgeable enough to do so. Every company needs worker bees, but be careful of only <\/em>having worker bees.<\/p>\n

Your own biases will be allowed to roam free and cause all kinds of trouble if you don\u2019t immerse yourself in an ecosystem of thinkers. Whether these are your mentors or your executive employees, a culture of debate and courageous conversations is the best way to defend yourself against the mistakes of cognitive biases.<\/p>\n

It feels good to be told that you\u2019re right, but it\u2019s far more valuable to be told why you\u2019re wrong.<\/p>\n

This article is a collaborative effort between The Finance Ghost and\u00a0Arete Advisors<\/a>\u00a0<\/strong>\u2013 all rights reserved.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Humans are a weird bunch. We oscillate between rationality and irrationality. We develop probability theories and then we don\u2019t use them. We do odd things like differentiate between \u201cfun money\u201d and savings, as though there are two types of money in this world. We spend differently depending on where the money came from, even though money is perfectly fungible. We …<\/p>\n","protected":false},"author":2,"featured_media":3031,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[64,26],"tags":[172,175,173,176,174],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/3030"}],"collection":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/comments?post=3030"}],"version-history":[{"count":0,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/3030\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/media?parent=3030"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/categories?post=3030"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/tags?post=3030"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}