Cognitive illusions and falling in love; moving beyond your gut feeling in tech scouting

I’m in love, head over heels, I don’t need to look any further, I want it! This machine learning, profit generating growth machine has caught my eye last week, and I can’t stop thinking about it. I want to invest, I want to invest badly.

I am sure that if you are an investor you also know this feeling. You come across a company that is active in exactly the space you and your colleagues are excited about and you found it! You are super excited and proud because it does not happen that often that you find a super cool company that so perfectly fits your criteria. But at the same time, somewhere in the back of your mind is this other voice, that reminds you of the dangers of falling in love too soon. But you are already ‘lost’. From this moment on you slowly start getting less objective and less open for any arguments against continuing conversations with your exciting lead. And that is when you subconsciously start building up your cognitive illusion.

In his book ‘Thinking, Fast and Slow’, Daniel Kahneman describes all kinds of cognitive illusions like the one described above. A cognitive illusion is like an optical illusion, where for example one line clearly looks longer that another one right next to it, but when you measure it they prove to be the same length.

Cognitive illusions work in a similar way, you think you have clear rational thoughts on something but your brain fools you without realizing it. Kahneman gives many examples of situations where your brain suffers from a bias in a certain direction. Many of those examples are all too familiar to marketeers: Your brains anchor to a number when they hear it and any number that you have to think of up after that, is likely to be close to the number you just heard. Or you are biased towards a believing a convincing story even if there is not enough evidence to back it up. Kahneman even states: ‘As Humans we tend to believe strongest in things we do not have any evidence for at all’

As an investor, it is important to be aware of all these biases, to avoid making suboptimal decisions. One thing I strongly believe in as an investor, is that whenever you are interested in a specific theme, before you fall in love with any company, you should quickly identify all the companies that are active in that space and then narrow down that list, until you have identified the most likely winner. This is why, at Venture IQ, we build software that does exactly that, helping you identifying companies globally and narrowing down your list on more objective criteria. Note to self: check out all AI based web analytics software companies in Catalist 🙂