How Biases Can Color Entrepreneurial Decision-Making

Survivorship Bias

Survivorship bias is the heuristic of focusing on a successful subgroup and believing it to be representative of the entire group, often due to the failed subgroup’s lack of visibility.¹ Survivorship bias is especially prominent in the startup world. It is widely known that nearly 90% of startups fail.² Nevertheless, a majority of entrepreneurs are confident that their venture and entrepreneurial journey will be successful. Oftentimes, these bold statements are backed by references to stories of successful startup founders such as Mark Zuckerberg or Bill Gates (a.k.a. the survivors). What does not cross people’s minds so easily, however, is the number of failed founders. In a sense, survivorship bias is a form of the availability heuristic, which describes our tendency to rely more heavily on information that comes to mind quickly and easily when making decisions about the future.³

Survivorship bias affects decisions to pivot in a similar way. There are several startups became successful as the result of a major pivot: some notable examples include Slack, Twitter, and Instagram. Such stories can misrepresent the success rate of radical pivots. As a result, founders may be inclined to pivot, even when doing so is more of a last-ditch effort rather than a sound business strategy.

Hard pivots are often only a means of stalling failure for many companies.⁴ Therefore, it is important to recognize when the urge to pivot may only be a reflection of deeper underlying problems with your startup. Understanding survivorship bias can help you navigate this decision with less unrealistic optimism and more sound reasoning, as focusing a bit more on the failures can paint a more holistic picture. And that picture is sobering: One study found that approximately ~10% of startups fail due to an unsuccessful pivot.⁵ 

Of course, successful pivots are indeed inspiring. Just remember: pivots are not always successful.

The sunk cost fallacy describes our tendency to consider past investments of resources when making decisions, often resulting in the decision to continue the behavior at hand.⁶ While virtually everyone succumbs to the sunk cost fallacy, it can be especially common among entrepreneurs, who invest great amounts of time, energy, and capital into their projects with hopes of seeing their vision materialize. This fallacy can be costly, as it can bias entrepreneurs towards executing a strategy or operating their business well beyond the point where they should have given up. Why? They don’t want their “sunk costs” to go to waste. As a result, they continue to waste more resources. 

Sunk costs can make it very difficult to decide to pivot. This relates to the concept of “psychological ownership” in entrepreneurship, which describes entrepreneurs’ tendencies to become one with their ideas, both internally and externally.⁷ Prior investment can cause entrepreneurs to develop a personal attachment to their product or strategy, which can contribute to the risk aversion associated with pivoting.⁸ It is important that entrepreneurs do not get too attached to their original or present business model. By avoiding doing so, they can be more open-minded when approaching alternative strategies that could indeed put them on the path to success. It can also help to frame projects in the context of future utility, by thinking and talking about your business in the future tense. 

Entrepreneurs are passionate about the business they are building. Their commitment and unwavering belief in their startup is often what helps them transform their idea into actuality. However, this can be a double-edged sword, as entrepreneurs’ faith in themselves can affect their ability to notice that their idea may not actually be viable. This is often referred to as overconfidence bias, which describes people’s tendency to overestimate their abilities to perform a task or the probability of success in comparison to an objective evaluation. 

Overconfidence bias can affect the decision to pivot in both ways. For example, an entrepreneur may have great faith in their current strategy, and thus avoid a pivot. On the other hand, they may be inclined to execute a hard pivot, and may do so carelessly due to their overestimation of the likelihood of success. 

The biases described above all contribute to confirmation bias, which is our tendency to more frequently notice and absorb information that supports our underlying beliefs. Biases such as survivorship bias, sunk cost fallacy, confirmation bias, and even overconfidence bias can exacerbate confirmation bias. Entrepreneurs may find themselves selectively focusing on feedback that supports their original idea, and ignoring feedback that suggests otherwise. This, of course, applies to decisions regarding pivots as well.⁹ 

For example, an entrepreneur who just developed their minimum viable product (MVP) may begin to conduct pilot testing. It is likely that the entrepreneur has some hypotheses going into the testing phase. As a result, the entrepreneur may interpret the results of the pilot testing in ways that validate their original hypotheses. As a result, he or she may miss crucial signs that indicate a pivot in strategy is necessary. 

To pivot, or to persevere—it can be the most difficult decision for entrepreneurs to make, and a crucial one at that. Upon reviewing the various biases that can affect this decision, we also notice a third option quietly lurking: to pull the plug. While pivots are quite common among successful startups, it is important to realize when you are pivoting only to put off admitting failure. Realizing this saves time, effort, and resources down the road. At the same time, it is essential that entrepreneurs are able to recognize when their present strategy is not working, and a pivot is necessary. Understanding the biases described in this article can help entrepreneurs approach the decision to pivot more rationally. 

One final recommendation comes from Eric Ries, entrepreneur and author of The Lean Startup: to seek the “perspectives of outside advisors who can help us see past our preconceptions and interpret data in new ways.”¹⁰ While being aware of the aforementioned biases can be helpful, it is often not enough to escape them. Third-parties have the ability to more objectively assess the state of your startup, as they personally haven’t invested their own resources.