8 Biases That Cloud Decision-Making (and How to Manage Them)

What's up everyone? Welcome back to another episode of Founder's Journal. I'm Alex Lieberman, co-founder and executive chairman of Morning Brew, and my job is simple. It is to make yours easier as an entrepreneur. Before we hop into the episode, I would love to ask you for a favor. If you like this episode, when you're done listening, please share it with a friend. You will help the show grow and you will also help your friend get smarter. It's a win-win situation. Today, I'm talking about eight decision-making biases and how they show up in business. Let's hop into it. I follow this guy on Twitter. His name is Daniel, and I apologize in advance if I mispronounce it. It's M N K E, so I'm going to guess it's Minky, and his niche is investing and psychology principles. I came across a recent post of his, which is about eight ways that. Our decision-making gets biased in everyday life. Some of these biases are obvious, and it just helps to have a name attached to them, and others are less obvious but equally as important to understand. So what I'm going to do is walk through each of the biases that Daniel talks about in his thread, and then I'm going to give an example of how I've experienced each one in my businesses over the last 8 years. Decision-making bias number 1, illusion of skill. Illusion of skill is this idea that we regularly confuse luck with skill because we solely focus on outcomes. And one of the more intellectually dishonest moves by leaders in a business is to take credit for what happened versus why it happened when things go well, and then shirk responsibility for what happened and justify it by explaining why it happened when things go poorly. Here's a classic example. A leader makes a hire. That hire does great. The leader takes credit for the hire. You then dig into why they made the hire in the first place, and you realize there was actually very little thought process behind why the leader hired this person. They just got lucky and the person outperformed, not because the leader made the right decision. Let's flip to the other side of this. The same leader makes a hire. That hire does poorly. The leader makes excuses for the hire. They try to back it up by justifying the thought process, behind why they made that hire. Illusion of skill happens all the time in business, and people use it either to their advantage or when it's not advantageous to them, they use it as a skill or a crutch to make them look better in a bad situation. Decision-making bias number 2, recency bias. This is one you may have heard of. We tend to put too much weight on recent events. When things are going great in business, you assume things will stay great. When things are going poorly in business, you assume they will continue to get worse. And I think a great example of this is paid marketing and customer lifetime value with startups. Founders often fall into this trap when they launch a business or start spending on paid marketing. What happens is they start acquiring really high-quality customers organically or through paid marketing, and because of that, they start modeling out unrealistic expectations for growth and return on ad spend many months or even years into the future. Now, the issue with this assumption is that in the early stages of a business, when you are acquiring your earliest customers, you are likely acquiring the most valuable customers you will ever acquire in the life of the business. These are the people that converted after seeing a single ad, or the people that are experiencing the problem that you're solving so much that they go out of their way to find you. But the issue with this is by projecting high quality, low cost of a customer well into the future. This is the definition of being tricked by recency. And candidly, it's why a lot of these direct-to-consumer businesses looked worse and worse as time went on. Use the example of Morning Brew. Our first 1,000 subscribers were significantly higher quality than our 4.5 millionth subscriber. Decision-making bias number 3. Anchoring. Anchoring is this idea that our judgment is heavily skewed by the first information we are given about something. And I'm actually going to give an example about how anchoring is used as an effective tool in business to bias customers' decisions in a way that a company wants to. So much of a company's pricing strategy is based on the idea of anchoring. If you go on Amazon right now, you will see an Insignia for 42-inch Fire TV on sale for $129 instead of $199.99. And if you look at the actual website, what you'll see is $199 on the screen with a strikethrough, and the new price of $129 is in huge font with 35% off next to it. Strikethrough pricing is an example of anchoring, where the first information you see is higher, and then what you're then shown is objectively better than the first price that you saw. Another example is how pricing works on most software companies' websites. There is a reason every software site has some permutation of the basic tier, the professional tier, and the enterprise tier. And what happens is the extreme options, so basic and enterprise, will anchor you so you're most likely to choose the middle or at least from a customer's perspective, you perceive it to be the most conservative option that you consider to be the best bang for your buck. So companies are using anchoring to get you to choose the option in tiered pricing that they want you to, where they don't actually really care about most of the tiers. We're going to take a quick break, but more from Founders Journal when we get back. The 4th decision-making bias is hindsight bias. You probably know this one as well, but it'll be interesting to talk about in the context of business. Hindsight bias is this idea that in retrospect, events seem more predictable than they actually were. We are, as people and as professionals, really bad at remembering and considering the information that we had and the thought process that we went through to make a decision in the past. And this is why I believe decision journaling is such an important exercise. So a classic example of hindsight bias is when you make a hire, They do poorly. You get to the mental place where, you know, the right thing to do is fire them. And then you start saying things like, I knew this was going to be an issue when we hired them. Why didn't I trust my gut? Now, the issue with this reaction and this line of thinking is whenever you reason by memory, you way more easily recall the supporting evidence for why you have to make a certain decision now versus potentially really strong evidence at the time for why hiring them was the right decision. based on what you knew then. Decision-making bias number 5, the halo effect. The halo effect is this idea that you either like or dislike everything about someone or something, and there's nothing in between. And I've personally seen the halo effect in action so many times in business where once someone has a certain point of view of a coworker or a manager or an employee, it is nearly impossible for them to bring nuance to that view. And I think it's a protective mechanism because when we don't like something about someone, that equates to danger in business. And it's hard for us to hold thoughts that both feel dangerous and safe at the same time. But the issue with the halo effect is that it limits our ability to take ownership and accountability of someone's growth in a company by celebrating the things that make them great, but doing everything we can to support them in the things that hold them back. For people who really suffer from the halo effect, they will default to promoting or firing over anything that sits in between. Number 6 for decision-making biases, loss aversion. Losses weigh twice as much as the equivalent gain. Because of that, we reject gambles where chance could favor us. And I think this bias of loss aversion is especially true in the world of investing and wealth preservation. But I would actually argue that entrepreneurs are less averse to losses than most 9-to-5 professionals. And I actually believe by definition, the venture capital model, which encourages home runs in business or strikeouts in business versus singles and doubles, it actually creates an incentive that forces founders to not be loss averse. Next up is decision-making bias number 7, commitment bias. We have a tendency to remain committed to our past behaviors and opinions, particularly when they're expressed in public, Even if they do not have desirable outcomes, what is funny is that I believe commitment bias is something that separates the best founders from okay founders. I believe the best founders rid themselves of commitment bias. They take a scientific approach to their bets and their opinions, and if there is ever strong enough evidence to suggest that their position is wrong, they will be emotionless about changing course without worrying about if they look bad. Now, on the other side, I think mediocre founders get tied up in commitment bias where they'll keep on with a losing strategy in their company far too long because they are afraid to show weakness and admit that their bet was wrong. Or you see this happen all the time with hires where leaders will keep mediocre employees too long because they are afraid it will reflect poorly on them if they have to fire someone who ultimately they had given the thumbs up to hire in the first place. And last but not least, decision-making bias number Number 8, what you see is all there is. What you see is all there is means you cannot consider what you don't know. Paradoxically, knowing less also increases your confidence about being right. And this idea of what you see is all there is can work for or against you because basically what it's referring to is your blind spots. And your blind spots can be helpful in career or it can hurt you in career. This idea of blind spots or what you see is all there is worked for Austin and I when we were launching Morning Brew because we had no idea how traditional media worked and what status quo looked like in the industry. This made us outside-the-box thinkers by definition because we literally lacked the knowledge that would have boxed us in to think things like business news is too crowded, or we have to hire journalists, or email is dying. So I say this all the time, but the fact we were naive, the fact that we had blind spots, is probably the only reason that we found so much success with our business. But what you see is all there is can also work against you generally by making bad decisions based on imperfect information. So let me give you an example. Today, I would bake a quota and performance incentives into a salesperson's plan, their compensation plan from day one. Now, in the early days of Morning Brew, we literally just paid sellers a salary and a discretionary bonus because we didn't want to create a cutthroat sales culture. It was something we were afraid of. Now, the intention was right, but we lacked the information to know that salespeople want to be in control of their own destiny. It's why they went into sales in the first place, and they want significant upside for hitting specific targets. This is why I believe second-time entrepreneurs not only have a higher probability of success, but they also can accomplish as much with their second business in 50% less time because you simply see far more the second time around. I always recall this story with the founder of FanDuel, who I spoke to a few years back, and this was after he was done with FanDuel, the, you know, the large gambling site. He was running 4 businesses, and I said, how are you running 4 businesses? Like, do you have any semblance of work-life balance? And what he basically said is, I actually have far more work-life balance than I did with FanDuel, because with FanDuel, I spent 80% of my time on the wrong things. Things. And so today, knowing what I know, I just spend my time on the 20% of things that actually matter and move the needle. And so those are the 8 decision-making biases from Daniel Minky and how they show up when building a business. As always, thank you so much for listening to Founders Journal. If you enjoyed this episode, share it with a friend, and I'll catch you next episode.