Entrepreneurial Psychology

http://msnbcmedia.msn.com/i/MSNBC/Components/Photo/_new/Afghanistan_Dynamic_Planning.pdf Justin Singer - justin.e.singer@gmail.com

January 2014

• Teaching Smart People How to Learn • Double-loop learning • Defensive reasoning • How can you do better?

• Building an Effective Team • Three types of diversity: social category, cognitive, and value • Look for unshared information • Let your people rest

• Even Swaps: A Rational Method for Making Trade-offs • Consequences tables

• The Hidden Traps in Decision Making • Anchoring, status quo bias, sunk cost fallacy, confirmation bias,

overconfidence in estimation and forecasting

Reading list

• Pay close attention to mental models -- they’re the basis for everything

• A startup is a process for decision making and action

• The most important decision you will make is whose advice to take

Today’s arguments

Product Strategy

Hiring Managing

Marketing Entrepreneurship depends on robust models of learning

habit behavior desire interaction expectation

Why psychology?

Mental Models

http://friqt.com/worldchil.html

“[M]odels people have of themselves, others, the environment, and the things with which they interact."

- Donald A. Norman. The Design of Everyday Things (1988)

What are mental models?

http://en.wikipedia.org/wiki/File:Cassini_apparent.jpg

Ptolemaic astronomy Assumptions? Useful?

http://www.fi.edu/wright/again/wings.avkids.com/wings.avkids.com/Book/History/instructor/jumpers-01.html

Winged flight Assumptions? Useful?

http://en.wikipedia.org/wiki/File:Surplus_from_Price_Floor.svg

Supply and Demand Assumptions? Useful?

Mental models define how we think the world works, but not necessarily how it actually works

- Me, just now

Mental models are necessarily personal If a model doesn’t work for you, build a better one

When judging a model’s quality, focus on process, not outcome

What are mental models?

How do we form mental models?

Real world

Interpretation

Feedback

What a video camera would record.

The story we create in our mind.

Is our story confirmed or disconfirmed? (usually we only ask the former)

Single-loop learning

http://en.wikipedia.org/wiki/Mental_model

Real world

DecisionInformation

feedback

Mental model

Decision making rules

“Insanity is repeating the same mistakes and expecting different results.”

- Narcotics Anonymous. Basic Text, pg. 11 (nope, not Einstein)

Single-loop learning

http://amonymifoundation.org/uploads/NA_Approval_Form_Scan.pdf

Want better results? Change your model

Double-loop learning

http://en.wikipedia.org/wiki/Mental_model

Real world

DecisionInformation

feedback

Mental model

Decision making rules

Learning loops in Product Design

Donald A. Norman. The Design of Everyday Things (1988).

What’s missing?

Donald A. Norman. The Design of Everyday Things (1988).

User feedback should alter the product by altering the design model

Learning loops in Product Design

http://guide.cred.columbia.edu/guide/sec1.html

Just because people are using the same words doesn’t mean they are thinking the same thing

And remember...

Strong sources of mental models

• Bayesian updating

• Physical laws (especially movement mechanics)

- Elasticity (springs)

- Friction

• Large and representative data sets (empirical observation)

• Careful experimentation (seeking to disconfirm)

• Relevant analogy

• Abstract theory

• Personal experience

• Irrelevant analogy

• Repeated observations (small data sets)

• Single observation (single data point)

• Anecdote/inductive reasoning (Malcolm Gladwell)

• Opinion

Unfortunately, the less data we have, the more heavily we weight it

Weak sources of mental models

Treat your models as hypotheses

Make sure they’re testable Models that can’t be disproven aren’t models -- they’re beliefs !

Actively seek to disprove them Welcome disproof -- a model disproved is a lesson learned !

Look for hidden assumptions Treat secondhand data as assumptions until proven otherwise !

Question their predictability The same event may be evidence of many different hypotheses

Models don’t care about your loyalty If a model doesn’t work, change it

Decision making

What does rational decision making look like?

Herbert A. Simon, Administrative Behavior

1. Complete knowledge and anticipation of the consequences of every choice

2. A valuation for each consequence

3. Awareness of all possible alternatives

What does actual decision making look like?

Herbert A. Simon, Administrative Behavior

1. At best, our understanding of consequences is fragmentary

2. Values depend on context, and future context is unknown

3. We never consider more than a small subset of possible alternatives

Optimizing (rationality)

Searching through alternatives until we find the best option.

Satisficing (bounded rationality)

Searching through alternatives until we find one that’s acceptable given the constraints at play.

Satisficing != Poor decision-making

What satisficing is: - A recognition of cognitive and situational limitations - A means for making decisions under uncertainty - A means for knowing when to move on

What satisficing is not: - An excuse to be lazy - A justification for poor process

The dark side of satisficing…

“People have basic physiological limitations of not being able to handle complexity, of unconsciously adapting to gradually changing conditions, of conforming to group and organizational norms, and of focusing on repetitive activities.”

Van De Ven. Central Problems in the Management of Innovation

Good decision process: PrOACT

• Problem

• Objectives

• Alternatives

• Consequences

• Tradeoffs

ProblemA good solution to a well-posed problem is almost always better than an excellent solution to a poorly posed one

• Consider the trigger - How problems present often bias our thinking — don’t let it! - Ex: best mailing list software vs. best way to manage direct-mail

• Question latent constraints - Problems often take unnecessary constraints for granted - Ex: when to meet vs. how can we finish this

• Establish a workable scope - Too narrow is bad. So is too broad. - Ex: how to save on gas vs. how to save on vehicle costs

• Gather outside feedback

ObjectivesObjectives are your decision criteria. They determine the what, how, and how long. They are also your basis for explanation.

1. Write down all concerns you hope to address through your decision, e.g., “don’t want to launch too late”.

2. Convert your concerns into succinct objectives, e.g., “minimize time to market”.

3. Separate ends from means to establish fundamental objectives. Ask “why?” until you reach something that’s important for its own sake. (Five whys)

4. Clarify each objective. Ask “what do I mean by that?” Be specific.

5. Test objectives to see if they capture your interests. Do they form a good basis for explaining your decision to someone else?

AlternativesAlternatives are your range of potential choices for pursuing your objectives. You can’t choose an alternative you haven’t considered.

• Don’t box yourself in with limited alternatives. Poor decisions often happen when you: - Fall back on the default alternative - Choose the first possible solution - Choose from alternatives presented by others - Wait until you’re stuck with what’s left

• Use your objectives—ask “How?” for each objective • Challenge your assumptions • Do your own thinking first • Ask others for suggestions • Create first, evaluate later • Always be searching for alternatives

AlternativesTailor your alternatives to your problem.

• Process alternatives. Sometimes the best choice is a process, e.g., voting, auctions, arbitration.

• Win-wins. Sometimes the key is to analyze someone else’s decision problem and make sure yours gibes with it.

• Information-gathering. Reduce uncertainties by identifying and collecting needed information.

• Time-buying. Deferring a decision is a decision.

Consequences & TradeoffsBe sure you understand the consequences of each choice. Once you do, the decision may well be obvious. If not, make even swaps.

• Describe consequences with appropriate accuracy, completeness, and precision.

• Build a consequences table.

• Make even swaps. (READINGS!!!)

“The fox knows many things; the hedgehog one great thing.”

- Archilochus

http://www.etsy.com/listing/60007735/woodland-animal-pair-hedgehog-and-foxExpert Prediction

Every feature suggestion opinion piece of advice is a prediction

What does this have to do with startups?

Who should you listen to? How much credence should you give?

http://www.theatlantic.com/technology/archive/2012/05/twitter-tech-elite-seriously-overstimated-facebooks-closing-price/257406/

What will Facebook close at on its IPO day?

http://collider.com/mark-zuckerberg-reviews-the-social-network/

http://www.theatlantic.com/technology/archive/2012/05/twitter-tech-elite-seriously-overstimated-facebooks-closing-price/257406/

Oopsies...

http://collider.com/mark-zuckerberg-reviews-the-social-network/* required significant price support from underwriters

$38*

Blurbed by Burton Malkiel Blurbed by FNMA ‘s Chief Economist

"Freddie Mac and Fannie Mae are fundamentally sound. They're not in danger of going under…I think they are in good shape going forward."

- Barney Frank (D-Mass.) House Fin. Svcs. Comm. chairman, July 14, 2008Placed into conservatorship in September

"I think you'll see [oil prices at] $150 a barrel by the end of the year" - T. Boone Pickens, May 20, 2008

$100/bbl in May - $135/bbl in July - $38/bbl in November

“The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model and it might not be successful.”

- Steve Jobs, Rolling Stone, Dec. 3, 2003Spotify and Rdio would beg to differ

Why?

These are very, very smart people who were very, very wrong.

http://www.stratabridge.com/2011/08/putting-the-t-into-leadership/t-shaped/

What does it mean to be T-shaped?

Fox-Experts Hedgehog-Experts

Fox-Dilettantes

Hedgehog-Dilettantes

One model for thinking about advisors

Fox Knows many things well !Hedgehog Knows one thing well !Expert Expert in the subject at hand !Dilettante Expert in a related subject (but not the one at hand)

When it comes to China, the Chinese Ambassador is an expert and the British Ambassador is a dilettante

Tetlock, Philip E., Expert Political Judgment: How Good Is It? How Can We Know? (2005), fig. 3.4

Refers to political extremism regardless of party

If advice is a prediction, then whose advice deserves your attention?

Turns out that a lot of knowledge in a single area is a dangerous thing

Short-term advice 1. Fox-Experts 2. Fox-Dilettantes 3. Hedgehog-Dilettantes 4. Hedgehog-Experts

Long-term advice 1. Fox-Dilettantes 2. Fox-Experts 3. Hedgehog-Dilettantes 4. Hedgehog-Experts

How to recognize a fox

• skeptical of deductive approaches to explanation and prediction

• disposed to qualify tempting analogies by noting disconfirming evidence

• reluctant to make extreme predictions of the sort that start to flow when positive feedback loops go unchecked by dampening mechanisms

• worried about hindsight bias causing us to judge those in the past too harshly

• prone to a detached, ironic view of life

• motivated to weave together conflicting arguments on foundational issues in the study of politics, such as the role of human agency or the rationality of decision making

Tetlock, Philip E. Expert Political Judgment: How Good Is It? How Can We Know? 2006.

Uncertainty stops most people in their tracks, but it’s only by movement that uncertainty can be resolved

“Strong opinions, weakly held.” - Paul Saffo

In the meantime, read widely think deeply focus on process choose your advisors wisely improve your model set move forward.

Osterwalder, pgs. 1-119

Case study (will be posted on CW soon)

Readings for next week