The Entrepreneur’s Psychological Traps.

Classic entrepreneurial decisional pitfalls.

Posted May 09, 2010

In today's post, I'd like to share several personal anecdotes that illustrate potentially fatal decisional traps that entrepreneurs commit. I hope that you'll find them of value.

(1) Build It and They Will Come: Not Necessarily!

Approximately twelve years ago, a former undergraduate student of mine put me in contact with an entrepreneur who was working on a first-generation webcam. The gentleman in question was an engineer, and so he was largely focused on and enamored with the technical specifications of the product. He had very little marketing know-how, and as such had sought my help in trying to commercialize his "cool gadget." As a first step, I asked him if he had conducted any marketing research prior to developing the product (e.g., to gauge the likely demand for such a product, possible usage concerns, pricing strategies, etc.), to which he responded that he had not (displaying the common "build it and they will come" bias that many overconfident entrepreneurs succumb to). I suggested that since many of the early adopters of this product would be university students, I might perhaps administer a quick survey to this sample if only to gauge its likely demand. The entrepreneur then stated something very telling (which I am paraphrasing as I do not recall the quote verbatim): "I don't want to hear that there is no demand for this product. I have already spent well over $1,000,000 developing it. What would I do if I receive bad news via your survey?" After a moment of dumbfounded incredulity, I composed myself and retorted that he should put up a photo of me in his living room as this would imply that he would have lost only $1 million rather than the much greater sum of money that he would likely lose if he were to chase an empty dream! He was unhappy with my advice, and ended up bailing on the consulting fee that he owed me. This personal anecdote reminds me of a recent Kitchen Nightmares episode (with Chef Gordon Ramsey) wherein the restaurant owner stated something to the effect of: "I don't want him [Ramsey] to tell me all that is wrong with my restaurant. I thought that he was here to help me." [I am paraphrasing]

(2) Too Much Overconfidence Hinders One's Ability to Learn

One might think that entrepreneurs should cloak themselves in a coat of overconfidence, as they might otherwise never have the courage to undertake risky initiatives. This is certainly a plausible premise albeit I suspect that the benefits of overconfidence are best captured by an inverted-U curve (i.e., having too little or too much is not optimal). We know that clinical depressives do not suffer from a delusional self-perceptual glow when it comes to the manner by which they attribute successes and failures in their lives. Most individuals tend to attribute successes internally ("I did well on the exam because I am smart.") and failures externally ("I did poorly on the exam because the professor is an idiot."). The direction of the causal link, or more colloquially the "chicken-and-egg" issue, of whether such individuals are innately more realistic and hence more prone to depression or whether being depressed causes them to be more realistic, is unclear. That notwithstanding, it would appear that having no capacity for overconfidence is detrimental to one's mental health. On the other hand, being too overconfident can border on the delusional and can reduce (if not eliminate) one's ability to learn from past experiences (especially failures). Returning to the locus of control issue, namely, the proclivity of individuals to attribute events in their lives to internal versus external factors, suppose that a businessperson displays a strong external attribution style when it comes to any personal business failings (hence he/she is overconfident about his/her abilities to make optimal decisions). Such a person is unlikely to learn from his/her poor business decisions, as failures will be attributed to external factors ("God did not want me to succeed", "Consumers in this neighborhood are idiots", "The economy was at fault."). In the mind of such an individual, what is unequivocally clear is that the outcome was not due to his/her doing. I have had the very unpleasant experience of being asked to provide my opinions to a budding entrepreneur, to then quickly find out that he was uninterested in anything other than to be provided with compliments. When I shared negative feedback, he discounted my ideas as "too bookish." Someone ultimately has to tell the emperor that he is naked lest he might contract hypothermia. However, this entrepreneur simply wished to be told that he was wearing a gorgeous Armani suit despite being buck naked!

(3) Solely Processing Information That Supports One's Position

My former doctoral adviser shared with me a powerful anecdote many years ago about individuals' inability to see past their strongly held positions (in this case as relating to the viability of launching a new product). A company that was having a difficult time deciding whether to launch a new product had sought his professional advice. It was decided that a focus group would be held wherein relevant individuals would discuss the pros and cons of the launch while executives on both sides of the issue watched behind a one-way mirror. At the end of the discussion, both parties felt that the focus group exercise had fully vindicated their position! How could it be that individuals, who otherwise hold opposing positions, can watch the same set of information (in this case a focus group discussion), and conclude that the new information strengthens their conflicting position? The answer is quite simple. It is rooted in individuals' uncanny ability to solely tend to information that supports their previously held position and/or to discount any information that contradicts it.

There you have it.  Ciao for now.

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