History of private equity and venture capital
Because of the lack of information, high uncertainty, the need to make decisions quickly, founders of startups use lots of heuristics and exhibit biases in their startup actions. Biases and heuristics are parts of our cognitive toolboxes in the decision making process, and they help us to take a decision as quick as possible under uncertainty, but sometimes become erroneous and fallacious.
- Post-money valuation
- High-yield debt
- Venture capital financing
- Liquidation preference
Entrepreneurs often become not only overconfident about their startups but also about their personal influence on an outcome (case of illusion of control). Entrepreneurs tend to believe they have more degree of control they have over events, discounting the role of luck. Below are some of the most important decision biases of entrepreneurs in start up a new business.
Knowledge representation and reasoning
Many entrepreneurs seek feedback from mentors in creating their startups. Mentors guide founders and impart entrepreneurial skills and may increase self-efficacy of the nascent entrepreneurs.
Design thinking is used to understand the customers’ need in an engaged manner. Design thinking and customer development can be biased, because they do not remove the risk of bias because the same biases will manifest themselves in the sources of information, the type of information sought, and the interpretation of that information.
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Someone famous in Source Title Startups use a number of action principles (lean startup) to generate evidence as quickly as possible to reduce the downside effect of decision biases such as escalation of commitment, overconfidence, and illusion of control.