Decision Biases

Providing good returns in venture investing requires making decisions at critical times.

Human psychology is biased. We tend to make irrational decisions that increase the probability of sub-optimal results. A good book on the subject is Thinking Fast and Slow by Daniel Kahneman and Amos Tversky.

I made the following list of types of decision making biases. I review it often to keep myself rational.


Decision Biases

Activity

Desire to make changes when patience has a higher probability of success

Adverse Selection

Considering only that which is available for lack of a virtue

Affect

Being influenced by an immediately preceding feeling about something unrelated

Anchoring

Overlooking the absolute amount and judging relative to a stated reference

Attribution

Crediting skill for success and luck for failure

Availability

Evaluating the probability of something from a few memorable examples

Complexity

Optimizing for unimportant or overlooking important factors

Compromise

Splitting the difference when it isn’t clear which choice is best

Confirmation

Overweighting information that confirms prior beliefs

Correlation

Incorrectly inferring a causal relationship from correlated patterns

Endowment

Valuing something owned more highly than the same thing for purchase

Familiarity

A preference for things that are known or routine

Framing

Reacting differently to the same choice whether its benefits or its costs are stated

Gut feel

Acting passionately without following effortful reason-based analysis

Halo

Overweighting the opinion of somebody with a credential

Hindsight

Judging past events and decisions in view of later-known information

Interdependency

Disregarding networks of effects from causal interdependencies

Limitlessness

Intending non-specific ideal results without accounting for the cost to achieve it in view of necessary trade-offs 

Loss Aversion

Holding losers or selling winners early

Mediocrity

Overlooking the possibility and effect of extreme outliers

Narrative

Overestimating the probability of outcomes that fit a story, expectation, or preference

Omission

Accepting greater risk by inaction to avoid the possibility of blame for failure

Opportunity Cost

Deciding without the context of alternatives

Scale

Confusion of linear and exponential functions or using an inaccurate exponent

Self confidence

Overestimating one’s own skill or judgment

Sunk Cost

Including past costs in calculations

Survivorship

Studying examples of success while overlooking examples of failure with similar attributes

Temporal

Undue relative consideration of near- and far-term results or effects

Timing

Hesitation under urgency or committing before necessary

Trend

Belief that patterns found in random noise foreshadow future trends other than regression to the mean

Unavailability

Viewing an absence of evidence as evidence of absence