Thursday, January 29, 2009

How to Make Unbiased Decisions in Startups

A recent article in MIT Sloan Management Review "Decision 2.0: The Power of Collective Intelligence" presents a great decision framework.

In a world of startups, especially those backed by VCs, there should be a striking balance between agents' (entrepreneurs) decision making based on emotions and intuition and principals' (investors) ability to take the emotion out of the equation to exert "unbiased" advice to the company. On a second thought, emotion and biases almost ALWAYS exist in any decision making processes.

As related to a startup, the whole premise of venture financing is "Here's the money. grow your business. It's okay to make mistakes, but make as few as possible and move on quickly if there are flaws". So, why am I saying this?

STARTUPS MUST MAKE DECISIONS WITH PRUDENCE AND HAVE UNBIASED DECISION MAKING PROCESS IN THEIR DNA. Here are some of the pitfalls, as mentioned in the article, as related to venture business.

  1. Self-serving bias (seeks to confirm assuptions): Startups often deal with a very few or no information because of the nature of the business. Entrepreneurs usually make assumptions about markets, customers, financials, HR, etc. and searches for data to confirm this. If the assumption is wrong, they are just pushing themselves further away from the "right" answer. Ever had a situation where a cool product feature is exactly what you wanted and everyone else you Googled to confirm the assumption?
  2. Social interference (influenced by others): Yes, VCs follow the trend and invest in the wave of things. Entrepreneurs need to balance this out in a way that's contrarian to the society. When everyone thought search was a mature business with multiple dominant players in the late 1990s, Google made its way through, by being a contrarian.... sort of.
  3. Availability bias (satisfied with an easy solution): This is a hard problem. We entrepreneurs think anything is pretty much possible. This one is really tricky because there might be some things that are worth time and effort of doing despite the complexity. On the other hand, there are quick and easy stuff that can get done easily. I don't know what to say about this much beyond than that.
  4. Self-confidence bias (believes prematurely to have found the solution): I actually think this helps startups. Assuming that this kind of decision get reiterated many times in a short time period (like agile development process), it could be a tremendous help. Entrepreneurs, by nature and definition, are full of self-confidence. Just make sure that you know this may not be THE solution.
  5. Anchoring (explores in the vicinity of an anchor): Building personal relationship and leveraging people's knowledge in your network is often used by startups. Remember, the relationship you've built may be self-selecting. You like them. They like you. Both influence each other.... in a cyclical way. Knowledge and influence cycle through the same system infinitely without seeing the outside world. Explore more. Be ready to talk with random people to hear second thought.
  6. Belief perseverance (keeps believing despite contrary evidence): Being a contrarian and out-of-wack essentially are the same thing, depending on the outcome. Please, please, don't keep believing if a majority of people who (might) care about your product say "no". I've seen a plenty of people who keep on saying that they are right and will change the world and future will make the judgment call. If you (or people you know) fall into this category, please, please say that in the future. We got better things to do now.
This is just a partial list of decision making "frameworks" from the article. Good read, overall, so I encourage all of you to do the same exercise I just did.

Lastly, be unbiased and fair. Don't let the biased blind get in your way.
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