Cognitive Biases Among Entrepreneurs; Unlocking the Entrepreneurs’ Minds

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In its December 2012 edition, the Caravan magazine published a profile of Arnab Goswami, editor-in-chief of Times Now news channel, portraying him as an insecure, distrustful bully who settled for nothing less than complete and ultimate control of everything and everyone around him. The profile generously put to use quotes from Goswami’s former and current colleagues. “He isn’t a conformist, but he wants conformists working for him,” complained a manager. “He didn’t want a situation where employees are capable of making decisions for themselves. It’s an insecurity…” said an editor. “You are dealing with an individual who is deeply complex, unstable and absolutely vindictive,” summed up scathingly a former subordinate.

Now it turns out Goswami’s rival and former colleague Rajdeep Sardesai, editor-in-chief of IBN18 Network, may not be all that different either. And that can be said reading an interview of none less than Sagarika Ghose, CNN-IBN deputy editor, but also Sardesai’s wife. Speaking to Mint Lounge, Ghose gave a rather revealing example to explain why she thinks Sardesai shouldn’t be making as many decisions as he does at the channel: “He is obsessed with what’s on the ticker, the top bands. This way the people who are doing the work are not empowered because they keep trying to second-guess him. In fact, my team is obsessed with Rajdeep. I delegate much more and believe if you empower people, things run on their own and you get fresher ideas.” Sardesai, who was also part of the interview, didn’t bother to refute her.

There is no doubt that Goswami and Sardesai are star television personalities in India. But they are also star entrepreneurs. Both quit highly successful roles at NDTV to help start and run rival English news channels that have consistently garnered high viewership ratings and changed – for better or worse – the way India consumes news. In fact, the Caravan profile credits Goswami for single-handedly transforming the prospects of Times Now after the channel’s disastrous first year.

But is it possible that it is precisely their shared cognitive trait – a visible lack of trust in the capabilities of others – that has helped Goswami and Sardesai engineer their entrepreneurial success?

In the absence of any evidence, such a question would certainly have been presumptuous. But a paper published in the latest issue of the European Management Journal by professors Christian Lechner and Sveinn Vidar Gudmundsson of the Toulouse Business School points to a strong link between cognitive biases of a founder and the performance of his/her firm. As the paper admits, it isn’t the first to do so, but what sets it apart is that it traces back biases that have long been established as causes of firm failure to firm survival. Of particular importance to entrepreneurship research is that the paper not only assesses the individual impact of the biases in question, but also the impact of their interplay and influence over each other on firm performance. Its findings are based on a survey of 335 firms (153 bankrupt and 182 non-bankrupt) that operated in a 10-year period in Iceland, a country that saw rapid economic growth until 2008 when it was ravaged by the financial crisis.

Of the three biases the authors put to test – overconfidence, optimism bias, and distrust – the startling find is on distrust. Generally speaking, distrust is a bias entrepreneurs are widely advised to eschew in favour of more agreeable behaviour, such as being open to ideas or sharing responsibilities and tasks with confidence. But professors Lechner and Gudmundsson find that the demands of an entrepreneurial firm can be more nuanced than that – and distrust in measured degrees can, in fact, positively influence firm survival. That is because, they reason, entrepreneurial firms are always under a threat of failure and distrust is an effective “failure avoidance” strategy, especially in cases of high-risk, non-routine activities such as starting a business.

However, the authors are careful to differentiate between entrepreneurs of low trust and entrepreneurs of high distrust. While the former are characterized by a sense of low hope, hesitance and passivity, the latter are keen yet sceptical and vigilant risk-takers. They are more likely to factor negative events, put in place well-planned “control mechanisms” and stay alert to potential moves of competitors, customers and suppliers. On the other hand overly optimistic entrepreneurs are prone to discount negative signals and overrate the likelihood of positive outcomes even in situations of no direct control. While the authors concede that all entrepreneurs are essentially optimists, they believe that it is the differences in their cognitive approaches that ultimately determine what crucial signals entrepreneurs are able to decode before making important decisions.

The study also found that distrust impacted specific areas of organization, which in turn positively influenced firm survival. For example, distrusting entrepreneurs were more likely to possess strong financial orientation since proper financial and accounting practices were one of the control mechanisms they put in place to reduce risk, and consequently, a strong financial orientation was found to have a direct positive influence on firm survival. (Interestingly, the study found that overly optimistic entrepreneurs had weak financial orientation, which negatively influenced firm survival.) Similarly, distrusting entrepreneurs were inclined to delegate less as delegation involves an essential loss of control, and delegating less meant a tougher and clearer prioritization of resource-use, which is critical for any firm during its under-resourced, initial years. The results established that the propensity to delegate, in fact, negatively influenced the survival of a firm.

But like any bias, distrust doesn’t always act in isolation and that’s when its positive influence could easily taper to transmute into negative influence. Of the other two biases tested, its most harmful combination was with overconfidence. This is because while distrust causes entrepreneurs to be sceptical of ideas or solutions that are not theirs, overconfidence induces them into thinking they do not need any external assistance regardless of the difficulty of task at hand. The resulting combination of both these biases in an entrepreneur could lead to a significant miscalibration of knowledge and abilities, severely risking firm survival.

So what practical inferences can actors in the entrepreneurial ecosystem hope to glean from these findings? The authors believe there are at least two. First, entrepreneurs are able to see that their cognitive dispositions do impact both the make-up and the performance of their organization. This awareness can help them build the right “regulatory” measures to limit decision biases, including recruiting staff or creating a network of advisors with the right “counter-balancing” dispositions. For example, overly optimistic entrepreneurs could make room for generally sceptical team members or highly-distrustful entrepreneurs could recruit individuals who are great at building and working in open and collaborative spaces. Second, banks, angel investors and venture capitalists already plumb the psyche of entrepreneurs during risk assessments. But could they also use the knowledge they have mined to build relevant support services for their entrepreneurs?

Clearly, nobody is suggesting that the biases that exist in entrepreneurs need to be offset or neutralized. That would be futile – the world sees the entrepreneurial activity it does precisely because of those biases. What deserves bearing in mind, though, is that their roles and functions are neither as simple nor as uniform as they may usually seem.

About the author:

Kaushik Satish has worked with the National Entrepreneurship Network, a non-profit organization supporting entrepreneurship development, leading their Communications efforts, and with Aol, an online media company, as an Editor. He is based out of Delhi and can be reached out at kaushik.satish10@gmail.com

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