Incubators and Cognitive Biases
Alex Tajirian
July 6, 2011
As
an incubator, you must teach entrepreneurs techniques for reducing
decision biases. You can use
these techniques to improve the success ratios of incubated entrepreneurs.
Cognitive researchers have identified two modes of
thinking: intuitive and reflective. The first is referred to as System One,
while the second is referred to as System Two. System One is a mode of thinking
that gives us a stable representation of the world around us, which allows us
to perform certain actions without much thought. An example of this would be
walking and contemplating something else at the same time. System Two, on the
other hand, is a mode of thinking that is reflective and analytical. Professors
Thaler and Sunstein popularized this distinction in their book “Nudge”.
Cognitive
biases arise due to System One thinking. This essay deals with reducing System
One thinking by looking at decision processes through a Systems Two lens.
Entrepreneurs need System Two thinking to complement their intuitive thinking,
as they are unable to fix errors that they do not recognize. The essay does not
deal with errors in strategic and marketing analyses.
When
listening to an entrepreneur’s business plan presentation, you must play the
delicate role of not being seen as a quality control boss. You do not want to
appear to question the entrepreneur’s enthusiasm or integrity. Instead, your
role is intended to stimulate discussion and debate.
Below
are some questions that you must present to entrepreneurs:
1. Did the
entrepreneur consider alternative scenarios? What are the justifications for
deciding on the presented scenario?
2.
Are the
presented analogies, if any, relevant to the business proposition?
3.
Are the
distinctions between facts and assumptions clearly stated?
4. Is the presented scenario overly optimistic?
5. Has the entrepreneur fallen in love with his or her idea? (This
bias is called reference class forecasting. See for example, “Delusions
of Successes: How Optimism Undermines Executives’ Decisions,” by Dan Lovallo
and Daniel Kahneman, Harvard Business Review July 2003.)
6. Is the worst-case scenario overly optimistic?
