Entrepreneurial

cognition and their

biases
 01 DEFINE
define what are the cognitions of
entrepreneurship, their biases, its
definition, and purpose

TI VE S
OBJEC 02 IDENTIFY
to be able to identify the
entrepreneurials cognitions, and the
d i s c u s s i o n , existing biases. and;
e n d o f t h e
at the t o:
e x p e c t e d
it is
03 CORRELATE
to be able to see the correlation
between the entrepreneurial's
cognition towards biases.
 WHAT IS AN
ENTREPRENEUR
?
• a person who organizes and operates a business or
businesses, taking on greater than normal financial
risks in order to do so.

• is someone who has an idea and who works to create

a product or service that people will buy, as well as
an organization to support that effort. An
entrepreneur takes on most of the risk and initiative
for their new business, and is often seen as a
visionary or innovator.
COGNITION

Cognition is defined as 'the mental action or process of acquiring

knowledge and understanding through thought, experience, and
the senses. ' At Cambridge Cognition we look at it as the mental
processes relating to the input and storage of information and
how that information is then used to guide your behavior.
 WHAT IS AN
ENTREPRENEURIAL
COGNITION?
• •Entrepreneurial cognition represents the processing of
environmental information; how to identify opportunities and
formulate corresponding strategies to make use of
opportunities is the core problem to be solved in the process of
growth of new ventures
 ENTREPRENEURIAL
COGNITION: WHAT IS
ITS PURPOSE?
• Entrepreneurial cognition pays more attention to the unique
information processing, opportunity evaluation, thinking mode,
and decision-making process of entrepreneurs under dynamic
entrepreneurial situations, and can answer the reasons that lead to
differences in behavior results from a deep level
BIAS
prejudice in favor of or against one thing,
person, or group compared with a n o t h e r,
u s u a l l y i n a w a y c o n s i d e r e d t o b e u n f a i r.
 WHAT IS AN
ENTREPRENEURIAL
COGNITIVE BIAS?
• An entrepreneur cognitive bias is similar to any other cognitive bias
in that it is defined as “a systematic pattern of deviation from norm
or rationality in judgment.” At various points throughout the day,
most of us are impacted by our own cognitive biases to some degree.
7 BIASES THAT
KILL STAR T UP S
 1 The optimism bias refers to our tendency
to overestimate our likelihood of
experiencing positive events and
underestimate our likelihood of
oPTIMISM experiencing negative events.
BIAS
 This type of bias causes entrepreneurs to

1
latch on to the “that will never happen to
me” mentality. Optimism bias can be
dangerous for a startup because it can
cause founders to engage in excessively
risky decisionmaking behaviors.
oPTIMISM Entrepreneurs and founders are
BIAS particularly susceptible to this bias.
 oPTIMISM BIAS
1 Tom is a bright and motivated entrepreneur who is in the midst of starting his
own restaurant. There had previously been six failed business attempts in the
building he purchased. Each venture was unable to get the necessary returns to
stay afloat and were forced to close. However, Tom felt as though he had what it
took to make this restaurant succeed. He was at the top of his class, full of big
ideas, and understood the pulse of young city-goers.

Tom pours his time and financial resources into the venture, refusing to accept
failure as an option or yield to potential shortcomings. A friend even tells him
that the street layout and surrounding competition simply made it difficult for
pedestrians to be drawn into the area. Yet Tom still feels that with his know-
how, he can circumvent these issues.

However, like the businesses before his, Tom’s restaurant is not cultivating
enough business.
 2 describes our tendency to underestimate the
amount of time it will take to complete a task,
as well as the costs and risks associated with
that task—even if it contradicts our
PLANNIN experiences.

G
FALLACY
 Entrepreneurs whose thinking is clouded by

2
the planning fallacy bias generally
underestimate the amount of time or
resources it takes to create something. This
type of bias can kill a startup because it can
lead to running out of funding or other
PLANNING resources needed to achieve a critical
business milestone. And when critical
FALLACY milestones aren’t hit and a “plan b” isn’t in
place, startups can quickly die
 PLANNING FALLACY
2 john is developing estimates for a construction project with a goal to build a three-
story house. Not so long ago, John already constructed an exactly same house in
another part of the city. Now, John is going to use historical data as a reference to
forecast the new project’s duration.
When analyzing past performance figures, John saw that it took 2 months to
complete each floor and that works were delayed for a week due to heavy
snowfall. In this way, the data is showing that the total estimate for John's new
project must be AT LEAST 6 months and a week.
However, instead of agreeing with the evidences, John was thinking of setting a
deadline in 5 months. John's reasoning was that his team has already acquired
enough experience while building the same house before.
Nonetheless, he pursued with his plan. However, in the end he his team didn't
finish their project on their targeted date due to weather conditions.
 3 the phenomenon whereby a person is
reluctant to abandon a strategy or course of
action because they have invested heavily in
it, even when it is clear that abandonment

SUNK- would be more beneficial.

COST
FALLACY
 When under the sunk-cost fallacy bias, founders
are often thinking, “I’ve already come this far,

3
why quit now?” Sometimes, that “never give
up” attitude is an asset that ultimately leads to
success, but oftentimes, it’s a self-inflicted path
to startup destruction. The mindset here is
typically “If I just keep up the effort, it’s going

SUNK- to work out like I want.” Unfortunately, that’s

not always true and founders waste time and
COST capital pursuing something not worth the effort

FALLACY
 SUNK-COST
3 FALLACY
Tim spend $10,000 on the development of a new cell
phone. Once the product is released, however, no
consumers display an interest in purchasing Tim's
company's new cell phone. The $10,000 Tim spent
on the cell phone's development is considered a sunk
cost since it was a failed investment, Tim won't be
recovering it and, therefore, shouldn't be considered
in Tim's decisions on the fate of the cell phone.
 OVERCONFIDENCEBIAS

4 Overconfidence bias is the tendency for a

person to overestimate their abilities. It may
lead a person to think they're a better-than
average driver or an expert investor.
Overconfidence bias may lead clients to
make risky investments
 OVERCONFIDENCE
4 BIAS
The Sydney Opera House stands tall and beautiful. The
beauty of the structure garners eyeballs from all around
the world. The people behind the construction must have
had a ton of experience.
The Opera house was estimated to complete in 4 years
with a cost of AUS $7 million.
The Sydney Opera house took 14 years after the first
estimate with a final cost of AUS $ 102 million. You
cannot have a better example of unrealistic optimism.
 STATUS QUO BIAS
5 Status quo bias is defined as the preference
for maintaining one's current situation and
opposing actions that may change the state of
affairs.
 STATUS QUO BIAS
5 HOW IT AFFECTS BUSINESS AND INVESTMENT DECISIONS

• Can cause a business owner to avoid taking risks or introducing changes.

• investors end up holding on to specific investments which are more likely to lead loss.

• owner/s or investor/s tend to be emotionally attached to their businesses hence the

unwillingness to part away even if offered with a reasonable price
• businessmen with status quo bias exaggerate the potential losses that they might face upon
changing the quo and justify that the quo is the best option. they tend to minimize the potential
benefits of other options to project that the status quo as the best decision.
• may also stop the bussinessmen to recruit new and more qualified professionals in the team due
to the uncomfortable feeling thus choose to stay with the old recruits.
 CONFIRMATIONBIAS

6
Confirmation bias is the tendency of human
beings to actively search for, interpret, and
retain information that matches their
preconceived notions and beliefs. The
confirmation bias concept comes from the
field of cognitive psychology and has been
adapted to behavioral finance.
6 CONFIRMATION BIAS
Imagine a business considering launching a new product. The CEO has an idea for the “next
big thing,” so he directs his team to conduct market research to explore its feasibility. The
team then carries out surveys, focus groups, and competitive analyses with this in mind.

Here’s where the confirmation bias comes in: First, the CEO is using market research as a
sham to confirm his preconceived beliefs about a product idea. He’s not letting data do the
talking. Next, the team is launching into the product development process knowing what
their boss wants. As a result, the questions they craft will likely be biased to give him the
answers he wants.
 HINDSIGHT BIAS
7 Hindsight bias is our tendency to look back at
an event that we could not predict at the time
and think the outcome was easily predictable.
It is also called the 'knew-it-all-along' effect.
7 HINDSIGHT BIAS
a stockbroker may be uncertain about a stock
and decides not to buy it. However, two
months later, its value increases by 50
percent and they claim ‘they knew it would
rise’. Yet the feeling they had at the time was
not strong enough for them to take the risk
and invest.
 Thank you for
listening!
hopefully we addressed all the targeted objectives for this
lesson. -Group 8