It is not unusual that an entrepreneur uses heuristics more often than systematic analysis for determining opportunity; however, the money-maker is more successful in choosing profitable ventures than the non money-maker, because their decisions are less influenced by a number of cognitive biases.
Money-makers effectively avoid cognitive biases that set in motion a series of events that lead to failure. Baron (1998) states, “Successful entrepreneurs, as compared to unsuccessful ones, may be less subject to a wide range of cognitive errors. . .” People tend to be creatures of bad habits when it comes to investing time and money in business ventures. Many entrepreneurs recognize opportunity at the peak of its potential, but by the time they choose to invest, it starts to decline. This is what researchers call a representative bias (Tverskey and Kahneman, 1974; Hogarth, 1980; Simon et al, 2000). In other words, an entrepreneur will use past or current successes to plan for success in a new market venture; however, in doing so they will overlook minor variables that can dramatically influence market performance over time. A second common cognitive bias is the tendency for an entrepreneur to be overly persistent. Persistence can be a trait of strength, but when an entrepreneur anchors their initial decisions and ignores the need to make vital adjustments in the process they leave themselves vulnerable to problems that arise in the micro-environment. A failure to adjust the business plan will cause an entrepreneur to lose sight of problems that can create an internal financial hemorrhage. (Kahneman et al., 1982). A third common cognitive bias is that some entrepreneurs are too optimistic about predicting outcomes. They think that the strength of their belief will protect them from failure. Furthermore, their overly confident attitude about success can distort their perspective and they begin to think that the outcome is subject to their control; this is what Hogarth (1980) calls an optimistic bias. In order to understand why money-makers are more consistently profitable than non money-makers, cognitive bias is important variable in identifying the reason for success.
In addition to identifying the cognitive biases of entrepreneurs, it should also be determined why some are less prone to biases and if it is a determining factor for financial success.
