

The Psychology of Entrepreneurial Misjudgment, part 1: Biases 1-6 - sharksandwich
http://blog.pmarca.com/2008/03/the-psychology.html

======
brlewis
Quote: _In my view, entrepreneurial judgment is the ability to tell the
difference between a situation that's not working but persistence and
iteration will ultimately prove it out, versus a situation that's not working
and additional effort is a destructive waste of time and radical change is
necessary.

I don't believe there are any good rules for being able to tell the difference
between the two. Which is one of the main reasons starting a company is so
hard._

I asked almost exactly this question here on news.yc. PG was kind enough to
post some advice that I've taken to heart: _Your existing users are the place
to start. There must be something they like about whatever you have, or you
wouldn't be there. So you just have to learn to understand them well enough to
turn that like into love. In the process you may appeal to a broader set of
users, and as you iterate the "typical" user you focus on can move._

<http://news.ycombinator.com/item?id=116383>

~~~
ambition
I think this insight applies to many life challenges, not just starting
companies. Some that come to mind:

* Courting, relationships

* Building a career within an organization

* Some unproven solution to a technical problem

* Building a blog readership

etc.

------
prakash
I guess I am in the same camp as Marc Andreessen, i.e. Munger being more
interesting than Buffet. The book is fantastic, it was a tie for the best book
I read last year, the other being "Founders at work".

Munger discusses many interesting things including "a Latticework of Mental
Models", Bias, etc. A few of those essay's are available online.

The one Marc Andreessen talks about is available here:
<http://vinvesting.com/docs/munger/human_misjudgement.html>

~~~
pmarca
That's actually the original version of the talk -- the version in the book is
considerably updated and was finished in 2005, just fyi.

~~~
prakash
WOW, didn't know you read Hacker news!!

I own the book, have highlighted almost every page, made tons of notes, try to
put in a lattice work pattern as Munger mentions, also try to use as many of
the things I learned in real life. Next step is to put it under my pillow and
get as much as possible through osmosis :-)

The one I keep joking with my friends is using "Constraint Mis-reaction
Theory" in getting hired. E.g: If one want's to get hired for a position, send
in a couple of people before you that are better than on you on paper, and ask
them to deliberately mess up the interview. By the time you walk in, you can
ace the interview, by interviewing the way you normally would.

If you don't believe me, think of the number of times, you have spoken to
folks at various companies and wondered how they got hired in the first place,
this didn't happen deliberately, but never the less, no one noticed :-)

~~~
pmarca
I believe it :-).

Charlie also talks about Ben Franklin working the system:

"As he was rising from obscurity in Philadelphia and wanted the approval of
some important man, Franklin would often maneuver that man into doing Franklin
some unimportant favor, like lending Franklin a book. Thereafter, the man
would admire and trust Franklin more because a nonadmired and nontrusted
Franklin would be inconsistent with the appraisal implicit in lending Franklin
the book."

I've always wanted to try that...

~~~
wallflower
If you do someone a favor, they may look down on you but if they do you a
favor, they respect you more... I believe I got my first real full-time job in
software that way.

I met the CEO of a ($300M/yr) company at a networking event (for job seekers)
that he sponsored (very classy - it was like a job fair except it wasn't
because there were cocktails and the atmosphere was relaxed and mingling-
favorable). I was talking to someone from a bio-tech startup and someone
tapped me on my shoulder ("Excuse me. The CEO would like to take a picture").
I was even more clueless about social niceties back then - I immediately
thought in my head "Meet the CEO?! sure!" - Basically I didn't even _excuse_
myself from the guy I was talking to and went over. I posed for the picture -
shook the CEO's hand.

The photographer took the photo and then I asked the CEO "can I give you my
business card?" (Before the event, I had made some Kinko laser printed ones
with my name on the front and three bullets about my skills [mini-resume] on
the back). I was surprised that I asked (the favor). And he regarded me for a
very short moment and said "Yes". And then he pulled out his wallet and gave
me his (I still have it). And I sent a thank you letter a week later (honestly
thanking him for hosting that great, alternative networking event). Then, they
called me in, asking me to come in and interview.

As a weird follow-up, through charity work, I've met someone (who is very
networked in the tech community). I told her the story - she loved it (and I
didn't know she was a personal friend of the now-retired CEO until after I
told her the story)

~~~
edw519
Great story - good for you!

------
davidw
Very nice. A few comments:

> And sure enough, in the wake of shifting towards restricted stock and away
> from stock options, Microsoft's stock has been flat as a pancake. The
> incentive works.

Does that "flat" include regressions for other factors? There might be one or
two other things that affect their stock price.

> A specific form of this dynamic in a startup is when you have multiple
> founders, of whom one is the CEO. The founder who is the CEO inevitably
> discovers that it becomes very hard to stay close personal friends with the
> other founders. As they say, it's lonely at the top -- if you're doing your
> job right.

What with the emphasis of YC on having cofounders, and being on very good
terms with them, I'd be curious to hear PG's take + any of the YC people
taking a more long-term approach.

------
nostrademons
> for every goal you put in front of someone, you should also put in place a
> counter-goal to restrict gaming of the first goal

There's a particular perverse incentive that comes from the _lack_ of equity
compensation combined with restrictive legal covenants. If an employee works
at a company where their only compensation is cash and yet they're under
restrictive IP or no-solicitation agreements, their incentive is to...destroy
the company. Think about it: the primary benefit they get from working at the
company is in learning the business practices and meeting lots of smart
people, but they can't use that resource as long as their old employer exists,
because of their legal agreements. So it is to their advantage to drive their
employer into bankruptcy, because this frees them from their legal agreements
(which are with now-defunct entity) and yet they have nothing to lose.

As I understand it, a compensation scheme like this is actually used in many
financial firms. Employees are given large performance-based cash bonuses, but
also have to sign no-solicit agreements that prevent them from running away
with coworkers or customers and opening their own fund. Perhaps this is behind
the unusual number of financial firms that get taken down by a single rogue
trader or group of traders, eg. Salomon Brothers, Barings Bank, Bear Stearns.

The employees don't even have to consciously think "I'm going to destroy the
company." More likely, they're thinking "I'm going to make this enormous bet
with company money, and if it pays off, I get to pocket half a billion
dollars. If it doesn't, the company goes down and I can start my own hedge
fund."

------
h34t
This is right up there in my own "top 7 influential books"...

Last year I put all Munger's "mental models"/biases/etc. (and a bunch of my
own) on index cards. Every now and then when I want a fresh perspective on
something, I scatter out the cards and line up things that seem to make
interesting/useful connections.

Another book worth checking out is "Influence" by Robert Cialdini (I read it a
few years ago, and now my copy has been lent out to so many of my friends it's
in tattered shards already). When Munger read it, he was so impressed that he
gave Cialdini a class-A share of Berkshire Hathaway for his 'service to
humanity' in writing that book.

------
mojuba
Munger's psychological insight is fantastic. Curiously, reality distortion (or
misjudgement) he talks about in its extreme is one of the symptoms of
psychosis. Essentially, he explains the causes of "mild" psychoses we all may
have from time to time: incentives, doubt avoidance, inconsistency avoidance,
etc.

Sorry, Marc Andreessen, but what do startups have to do with all this? If this
man is a billionaire it doesn't mean whatever he says is about making money.
I'm sorry, but your article is ridiculous.

~~~
h34t
Your startup depends almost entirely on the thinking and behavior of people:
you, the people in your company, and the people outside your company (who are
the reason your company exists).

According to Marc and Munger et al, understanding what makes those people
'tick' just might be important for your startup.

~~~
mojuba
> Your startup depends almost entirely on the thinking and > behavior of
> people

You startup depends almost entirely on personalities of its founders and also
professional skills of all employees.

Making psychology a cornerstone in building up a company is a wrong idea: I've
seen how psychology-driven corporate HRs ruined companies. Startups, I think,
are even more vulnerable in this regard.

Would you, for example, fire a good hacker who made significant contributions
and turned out to be a psychotic, biased person? If your answer is Yes, then
as a boss you'd probably fire such people like Linus Torvalds and Bjarne
Stroustrup.

~~~
h34t
> I've seen how psychology-driven corporate HRs ruined companies

I'd say that if an HR department has a good understanding of human psychology,
that understanding can only help them.

If they _only_ focus on psychology and nothing else, such as the domain
knowledge needed to do a great job in their particular business, then they're
myopic and liable to do a lot of damage. Perhaps that was the problem with the
HRs you describe?

>Would you, for example, fire a good hacker who made significant contributions
and turned out to be a psychotic, biased person?

Of course not.

It sounds like you're applying a set of irrelevant assumptions to me,
including: (A) that I would only hire people who are somehow "not biased" (the
very suggestion that such people exist indicates ignorance of psychology, not
a good understanding of it!) (B) that I'm so slow as to not have figured out
that significant contributions are often made by people who do not conform to
societal standards of "normal".

(A) and (B) are not only false, but they imply a _poor_ understanding of
psychology, not the nuanced, intelligent perspective that Munger, Marc, me, et
al are seeking to get closer to (and we're getting there, slowly, one biased &
imperfect insight at a time).

~~~
mojuba
I thought the key phrase in your comment was: "Your startup depends _almost
entirely_ on the thinking and behavior of people", emphasis mine, and I
responded to this seemingly wrong idea. I assumed "thinking and behavior"
implies some specific psychological aspects rather than "thinking and
behavior" in a broad sense.

Anyway, I suggest a thought experiment: let's say we have a successful tech
startup of 2 founders, 3 more developers and an accountant. How exactly would
you apply Munger's theory of misjudgement in this startup to make it better?
(more productive, improve the social atmosphere, better understand customers,
etc - what else?) Just 2-3 key points maybe, from the "nuanced, intelligent
perspective" you seem to be looking from.

~~~
h34t
Also -- in response to the thought experiment:

For me to "apply Munger's theory of misjudgment in this startup to make it
better" would basically entail putting myself in that startup's environment,
probing the situation to get a sense of what's going on, and then using all
the "mental models" or "thinking tools" I've got (including a lot of stuff
about human misjudgments which seem to be really useful and accurate a lot of
the time) to understand their situation & think of what could be done in new
and better ways.

I don't believe that the best way to solve most problems is by using formulas
that are so overcertain of themselves that they presume to be able to solve
someone else's problems from a distance, without knowing the details of a
situation or interacting in that environment. I believe that details matter,
as does close interaction with the environment that sustains your project.

------
zach
Regarding Poor Charlie's Almanack, the best way to buy the book is on a trip
to the Huntington Library near LA. No discount, nor is it signed, but that way
it comes with a free excuse to visit an amazing treasury of culture. Worth
doing!

<http://www.huntington.org/>

