By Rob Bueschen
The importance of sound investment decisions is critical in the investment world, as one mistake can lose a firm billions of dollars, not to mention a loss in credibility.
On the surface, it appears that investors have everything under control, exerting confidence in their decisions as they hit consistent home runs. But as we peel back the layers, empirical research shows extremely challenging and costly cognitive biases that must be battled to make sound decisions.
Cognitive biases are defined as “thinking patterns based on observations and generalizations that may lead to memory errors, inaccurate judgements, and faulty logic.”
“People are inherently biased and our unconscious biases affect our decisions and perceptions,” according to Dr. Khatera Sahibzada, an industrial/organizational psychologist who helps VCs and start-ups capitalize on talent by developing assessment and selection processes.
Because of the pressure and uncertainties investors face in making decisions, these biases are especially important to understand, as any bias factor can be amplified and become detrimental. For entrepreneurs, on the other hand, understanding how these cognitive biases come into play may provide leverage points for bringing ideas to fruition. According to research, the following five cognitive biases can affect investor decision making.
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