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People tend to start businesses for the wrong reasons People tend to start businesses for the wrong reasons
by Murray Hunter
2012-07-01 10:30:04
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People undertaking strategic analysis or some type of strategic planning to develop ideas and strategies for a new potential business could not be further from the truth. This is part of the textbook fantasy that business schools have taught us to believe.  

A person’s psychological state will directly influence perception of people, objects and events. This can potentially lead to perceptive distortion, especially if the person has any psychotic tendencies. Therefore any construed reality, decisions made, strategies crafted, resulting actions and consequential behavior would be based upon biased perceptions. Thus everything that develops within a firm including culture, management style, interpersonal relationships, rules and procedures, strategy, symbols and behavior will have some unconscious basis[1].  Perception and thinking processes that identify opportunities and shape subsequent actions have their origins both in the psych and the external world. Identifying an opportunity and exploiting it may have as more to do with inner needs i.e., recognition, love and affection, power and control, self esteem, or grandeur, etc., as with any rational thought processes.

We have our biases

Most people enter into a new business for reasons that are not rational and thought out badly. Our cognitive decision making processes are guided by heuristics or ‘short cuts’, ‘rules of thumb’, decision rules that influence our judgments and decisions. Heuristics have the potential to assist in decision making by cutting down on the person’s information load[2], allowing a person to make quick decisions about opportunities without taking any formal   analysis that would tend to highlight problems that prevents its exploitation[3].

Consequently, heuristics have some advantages in entrepreneurial decision making processes as deep contemplation of a start up may lead to numerous reasons why a potential venture should not start up. Heuristics are very important where opportunity windows are very short[4]. This helps in making quick strategy choices, saving time, and adding to flexibility. This can trigger the creativity process by imposing alternative scenarios to what is perceived through the senses. Heuristics are deep in our belief systems and maybe also influenced by our deep motivations and reflect our social conditioning. Heuristics and other biases become intertwined within our knowledge structures and become a factor of influence in the assessments, judgments, and decisions we make involving opportunity evaluation[5]. They are part of our decision making processes[6].

On the negative side, heuristics can become cognitive biases. Cognitive biases are errors of judgment based on misconceptions of the facts, memory errors, probability errors, motivational errors, and/or social influences. These are the basis of irrational reasoning which can lead to all sorts of mistakes in judgment[7]. The general conditions that people work under, particularly if it is an entrepreneurial environment will normally be characterized with information overload, uncertainty, strong emotions, time pressure, fatigue and the need to do unfamiliar things with little prior experience. This type of situation is a stressful one and a potential trigger for distortion in perception and reasoning. This usually occurs without a person’s conscious knowledge of the fact[8]. Human reliance on heuristics and biases tends to increase in busy environments described above[9], especially when immediate answers are required[10]. This is where lots of irrelevant information works its way into the reasoning process[11] and leads to cognitive biases that contribute to irrational and less than optimal decisions.

One of the most common cognitive biases is the overconfidence bias. People tend to be over optimistic about their chances of success which motivates them to start a business, even through real prospects may be poor[12]. People usually perceive their chances of success are higher than others doing the same thing around them[13]. Other common biases include the representativeness heuristic, a generalization about a person or event that leads to the consideration of only a few variables[14], the law of small numbers where a person uses limited number of population data and generalizes it over a much larger population[15], and the halo effect where there is a tendency for people to make attributions about something based on past events and/or performance[16]. Other biases include loss aversion where the disutility of giving something up is greater than the utility associated with acquiring it, optimism bias, the tendency to be over optimistic about the outcomes of planned actions, ostrich effect, ignoring something obvious in a negative situation, planning fallacy bias, a tendency to underestimate the time it will take to complete a project, professional bias, a tendency to look at things according to the ideas of one’s own profession without considering broader points of view, and an escalation of commitment as a tendency for people to keep on investing time, effort and money in losing courses of action because of the initial commitment.

Heuristics and cognitive biases are believed to be caused by the process of attribute substitution. Attribute substitution occurs when a person has to make a judgment (of an attribute target) that is very complex. As a consequence of the complexity, the mind substitutes a more easily calculated heuristic attribute to simplify complexity[17]. This occurs when the target attribute is relatively unavailable through reasoning (answer cannot be easily retrieved through memory), so an associate attribute (heuristic) is substituted. This process occurs because the heuristic is easily available in memory (i.e., a neural perception or primed in memory[18]), and this process is not detectable through the person’s reflective system. The attribute substitution process combines available knowledge and experience into heuristics that drive a new idea forward. In pragmatic terms, heuristics and cognitive biases are built into a person’s belief system.

Mistaking your aspirations for opportunities

Many people mistake their aspirations for opportunity. For example people put their money and efforts into a boutique, restaurant or spa for the wrong reasons because they like fashion and shopping, food and cooking, or aromatherapy and massage. In SME’s the values of the founder and the firm are the same in many cases. Perception of business opportunity is influenced to various degrees by a hierarchy of personal aspirations and concerns that cannot be easily separated from business goals. This can be dangerous if one is unaware of their influence upon thinking.

Emotions are part of our fundamental irrationality and unpredictability and thus an important influence on thinking. Our basic emotions come from inner extra-rational dynamics deep within our psych that are expressed as feelings, dreams, fantasies, and other imagined aspects of our lives[19]. Our more complex emotions like loyalty, sympathy, pride, confidence, achievement, embarrassment, indignation, bewilderment, pity, elation, satisfaction, boredom, shame, disgust, frustration, and surprise, etc, tend to be socially related and constructed[20]. Everything we perceive evokes some form of feeling and the process of creativity, innovation and invention is always an emotional and even a sensual experience in people as concepts are translated into words, numbers, diagrams, or objects, leading to something inspirational[21].  Emotions decide what we like, dislike, what is agreeable, disagreeable, giving meaning to our world. Emotions can sometimes help us see similar patterns across fields without conscious deliberation and plays an important role in signaling preferences for opportunities by arousing positive emotions, kindling enthusiasm and determining our reactions to shocks and the behavioral trajectories we take.

We view the world is filtered through our emotions which guides our self awareness to a past or future orientation. Any past orientation will be full of stories which influence our sense of meaning about the present. Some of the stories we remember will be full of regret for past mistakes, disappointment for what was not done, or full of satisfaction and/or pride for what was achieved. The past influences our interpretation of the present. Positive and negative experiences influence what we perceive, contemplate and put our focus upon in the now. The positive and negative memories of the past also guide our direction in the future. Positive memories guide us towards action where we have a high sense of self efficacy and negative memories tend to make us averse to taking action where we have a low sense of self efficacy. The future represents our positive hopes and aspirations, or negative fears and anxieties where positive emotions may lead to a sense of high self efficacy and become powerful motivators for action, while negative emotions may lead to sense of low self efficacy feasibility and averse to action. Extreme feelings of low or high self efficacy can lead to either reckless overconfidence in a positive emotional state or an aversion from action out of fear and anxiety in a negative emotional state. The same feelings are not uniform across the all activities, where a person may feel a high sense of self efficacy in some areas and low sense of self efficacy in other areas.

Too much past or future orientation may lead to personal delusion such as unrealistic hopes that an entrepreneurial opportunity really exists[22], or massive overconfidence in one’s ability to successfully implement a complex strategy in the field. Alternatively too much future or past orientation may lead to undue pessimism where the feeling of self efficacy and motivation is low, leading to states of anxiety and inaction.  Orientation in the past will anchor one into previous patterns of success, which promote rigidity, while too much orientation into the future may lead to fantasy, thus leading to unrealistic objectives and the ability to consider realistic scenarios[23].

It is usually very difficult to see abnormality as many psychotic traits are also important drivers of manager and entrepreneur behavior. Many well known business leaders could be considered narcissistic in nature[24]. Some forms of psychosis (attention-seeking, paranoia, obsessive-compulsiveness & narcissism) are actually qualities that help bring people to the top of their fields. However these same qualities in excess can lead to an arrogant and overconfident delusion, once at the top. Many managers have fallen from corporate grace for this reason[25].

It is sound advice to always ask one’s self before embarking upon any new venture; ‘what are your real reasons and motivations for doing so?”



[1] Kets de Vries, F. R. and Miller, D. (1984). The Neurotic Organisation, Diagnosing and Changing Counterproductive Styles of Management, San Francisco, Jossey-Bass, Inc.

[2] Gowda, M. V. R., (1999). Heuristics, biases and the regulation of risk, Policy Science, Vol. 32, pp. 59-78.

[3] This is one area where entrepreneurial thinking may be very different from management thinking. An entrepreneur without perfect information will act on intuition and hunch. Any analysis will be mental rather than through formal processes which managers in a company situation will tend to follow. Management analysis of new ideas will tend to frame the questions: What is wrong with the idea? Why should it not be exploited? What will be the potential problems?, etc. Thus analysis can become a very negative paradigm in management preventing new ideas emerging into new strategies.

[4] Tversky, A. and Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases, Science, Vol. 185, pp. 251-284.

[5] Mitchell, R. K, Busenitz, L, Lant, J, McDougall, P. P, Morse, E. A, and Smith, B. (2004). The distinctive and inclusive domain of entrepreneurial cognition research, Entrepreneurship, Theory and Practice, Vol. 28, No. 6, pp. 505-518.

[6] Wright, M., Hoskisson, R. E., Busenitiz, L. W. and Dial, J. (2000). Entrepreneurial Growth through Privatization: The Upside of Management Buyouts, Academy of Management Review, Vol. 25, No. 3, pp. 591-601.

[7] Baron, R. A. (1998). Cognitive mechanisms in entrepreneurship: why and when entrepreneurs think differently than other people, Journal of Business Venturing, Vol. 13, No. 3, pp. 275-294.

[8] Wilson, T. D., Houston, C., Etling, K. M. and Brekke, N., (1996). A new look at anchoring effects: Basic anchoring and its antecedents, Journal of Experimental Psychology: General, Vol. 4, pp. 387-402.

[9] Gilbert, D. T., Pelham, B. W., and Krull, D. S., (1988), On cognitive busyness: When person perceivers meet persons perceived, Journal of Personality and Social Psychology, Vol. 54, pp. 733-740.

[10] Gilbert, D. T. and Osborne, R. E. (1989). Thinking Backward: Some curable and incurable consequences of cognitive busyness, Journal of Personality and Social Psychology, Vol. 57, pp. 940-949.

[11] Chapman, G. B, and Johnson, E. J, (2003). Incorporating the Irrelevant: Anchors in Judgments of Belief and Value, In: Gilovich, T, Griffin, D, and Kahneman, D, (Eds.), Heuristics and Biases: The Psychology of Intuitive Judgment, Cambridge, UK, Cambridge University Press.

[12] Arabsheibani, D., De Meza, J., Maloney, J., & Pearson, B., (2000), And a vision appeared unto them of great profit: Evidence of self-deception among the self-employed, Economic Letters, Vol. 67, pp. 35-41.

[13] Cooper, A., Woo, C., & Dunkelberg, W., (1988), Entrepreneurs’ perceived chances for success, Journal of Business Venturing, Vol. 3, pp. 97-108.

[14] Tversky, A. and Kahneman, D. (1982). Judgment under Uncertainty: Heuristics and Biases, In: Kahneman, D., Slovic, P., and Tversky, A., (Eds.), Judgment under uncertainty: Heuristics and Biases, Cambridge, Cambridge University Press, pp. 3-20.

[15] Clement, J. (1987). The use of analogies and anchoring intuitions to remediate misconceptions in mechanics, Paper presented to the Annual Meeting of AERA, Washington, DC.

[16] Rosenzweig, P. (2007), The Halo Effect, London, Pocket Books.

[17] Kahneman, D. and Frederick, S. (2002). Represetativeness Revisited: Attribute Substitution in Intuitive Judgment, In: Gilovich, T, Griffin, D., Kahneman, D., Heuristics and Biases: The Psychology of Intuitive Judgment, Cambridge, UK, Cambridge University press, pp. 49-81.

[18] Priming occurs when an earlier stimulus influences a response to a later stimulus. For example, a person watches a television program the night before on conservation of forests. The next day someone asks the person for their views on conservation. It is likely the person will give views and ideas that originated from the program on conservation the night before. This is assuming the person does not already have any strong views on the subject.

[19] Chodorow, N. (1999). The Power of Feeling: Personal Meaning in Psychoanalysis, Gender, and Culture, New Haven, Yale University Press.

[20] Hunter, M. (2011), Opportunity, Strategy, & Entrepreneurship: A Meta-Theory, Vol. 1, New York, Nova Scientific Publishers., P. 250.

[21] Root-Bernstein, R. S., & Root-Bernstein, M., M., (2001). Sparks of Genius: The thirteen thinking tools of the world’s most creative people, Boston, Houghton Mifflin Company.

[22] Many people mistake their aspirations for opportunity. For example people put their money and effort into a boutique, restaurant, or spa for the wrong reasons because they like fashion, shopping, food and cooking, or aromatherapy and massage, only to close down a few months later because there was no real opportunity.

[23] However a future orientation in imagination may be the actual position that a science fiction writer may cherish. 

[24] Maccoby, M. (2000). Narcissistic Leaders: The Incredible Pros, The Inevitable Cons, Harvard Business Review, Vol. 78, pp. 68-78.

[25] Kramer, R. M. (2003). The Harder They Fall, Harvard Business Review, Vol. 81, No. 10, pp. 58-66, 136.

 


    
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