Buy Now Pay Later: why it works

The number of times I come across mentions of Buy Now Pay Later (BNPL) has dramatically increased and became ubiquitous in both brick and mortal businesses and the digital landscape in last 6 months. The BNPL concept is based on good repayment behaviour, in exchange for affordable purchases, through flexible payment plans. The market value of BNPL platforms such as Klarna, Afterpay and Sezzle is projected to rise globally at a CAGR of 21.2% by 2027.

Little bit of context for Southeast Asia. Out of the over 670 million people in the region, only 27% of the population have bank accounts. This sizable gap in banking penetration results in approximately 438 million unbanked individuals, with no bank account, credit or debit card or access to lines of credit. In parallel, there has been a shifting trend away from bank accounts and credit cards to services like BNPL, especially in younger consumers, due to debt aversion and ease of use. Hence, BNPL’s huge appeal.

The concept of BNPL is not new. Yet it is becoming increasingly popular and utilised due to a combination of factors, which include how humans are built as well as #COVID19 imposed restrictions (we have lot of spare time, are unable to travel and go shopping and feel the urge to online shop as a means of compensating), among others.

Here we review the main behavioural and psychological factors that drive BNPL:

1) Lose aversion

2) Present bias

Loss aversion

Research has found that spending money triggers areas of the brain associated with pain and disgust and that different forms of payment trigger different levels of discomfort. The pain of making a payment depends on the amount to be paid and on the method by which payment is made. Consumers who paid by credit cards rather than cash seem to experience less of a pain and hence were more willing to incur a given expense. As cash represents a physical representation of value, we feel more pain as people literally see themselves losing money.

Credit cards can be considered a prototype to BNPL as they use the same premise, albeit the only difference is paying the total price at a later date. Paying with credit cards provides a smooth transactional process, essentially decoupling the pain of losing their money in exchange for a product as there is no real money counting/giving process. An MIT study looking at purchasing tickets to a basketball game found that card-paying students were willing to pay twice as much as cash-paying students. Payment via credit cards is perceived as parting with a lower monetary value.

In both cases, the pain is linked to loss aversion, which is the tendency to prefer avoiding losses to acquiring equivalent gains. E-commerce companies are particularly adept at this, and constantly create urgency, offer deadlines for discounts and other ways of creating a psychological phenomenon of FOMO.

In brief, we are built to avoid pain by all means, which, in our daily lives, is recurrent phenomenon every time we pay via cash or credit cards. Perception of payment sometime later feels less painful.

Present bias

We humans are built to be focused/biased in present. We value $100 more today then tomorrow, less the day after and even less in future. In other words, present bias represent that fact that people place a greater value on goods/income achieved in the present moment – rather than receiving the same goods/income in the future. It suggests given a choice between a payoff today and a pay off in the future; we will choose to have the pay off now.

The timing of payments impacts the perceived value of a product. For example, people that pay for gym memberships monthly are more likely to exercise and renew their memberships compared to those that pay annually. These services provide a balance between pain and the perceived value/connection to the product. The focus shifts towards paying in future via smaller instalments, which are perceived as appealing and more affordable. As a result of tangible cash being abstracted away from us, it is harder to resist our impulse not to shop/consume via BNPL.

The BNPL business model is heavily relying on payment in future in various industries. Flexible options from ‘buy now, stay later‘ hotelier packages supporting Asian tourism, to car manufacturers’ deferred payment plans for boosting car sales, all the way to ‘fly now, pay later‘ air travel are increasingly popular.

You may ask what is the result of these two phenomena combined? Studies show that tourists (and pretty much any anyone) with high loss aversion and high present bias are more likely to overspend.

How we feel about covid-19

Experts used to believe that people evaluate risk like actuaries or insurance agents, using objective metrics and pro/con analysis. Many experiments and much research has found that people use mental shortcuts for measuring danger or assessing opportunity. These shortcuts, which humans developed during the long evolutionary process, are meant to let humans pay attention to dangers/opportunities that are worth their while while disregarding those that aren’t.

And they do so unconsciously, i.e. gut feeling, instinct and emotion usually play a significant role in decision small and big. With current covid-19 epidemic, many of our evolutionarily-programmed shortcut are being activated, without us realizing it. For example, as media in most countries started blasting about the perceived danger of the covid-19 outbreak, we visualized the most recent ‘similar’ H1N1 and SARS outbreaks. This is what is called availability bias. We retrieve from our memories the most accessible – usually either the most recent or the most traumatic/peak experiences – and consider this case to be like them.

Another mental shortcut is novelty. We are conditioned to focus heavily on new threats, leading us to obsess over the scariest reports and worst-case scenarios, perceiving the danger to be bigger. Assessing covid-19 as quite difficult ,considering even experts disagree on its potential impact (long term health implications, potential to have it second… time, optimal treatment, etc) but our brains make it look easier for us, translating gut feelings into reasoned beliefs.

“Our expectations about frequency of events are distorted by the prevalence and emotional intensity of the messages to which we are exposed”
Daniel Kahneman, Nobel Laureate in Economics

In extreme cases due to reports about covid-19, now with many European countries having thousands of cases and closing their borders or locking in an entire country, crowding out effect happens, i.e. our emotional impulses – fear, anxiety, panic, overwhelm our rationality.

If a risk seems especially painful/disturbing, people tend to raise their estimate of how likely it is to happen to them. Reports on covid-19 often feature upsetting imagery, people in panic, city-scale lockdowns.

Another trigger is a threat not understood or without a precedent. The less known it is, the more people fear and overestimate it. Research shows only 25% of weight is coming from facts and the rest is mixture of emotions, luck, and context. Consider the response to the partial meltdown of the nuclear plant at Three Mile Island, in Pennsylvania, in 1979. Though the incident caused no deaths, it led to public demand to turn from nuclear power to fossil fuels whose impact on air quality, alone, is thought to cause thousands of premature deaths every year.

Our minds tend to either “round down” the probability to 0 and we underreact, when it looks far or not touching us. When it comes to us, as it inevitably does, then we overreact, overestimate and go crazy about facts. This is again happening again in case of covid-19.

Only peak and end matter

Imagine you arrived at the airport on time, cruised through security, got the seat you wanted, your flight left on time and was smooth, yet when you landed, the plane sat on the runway for 30 minutes or your luggage was lost – how would you rate the overall experience? If you are like most people, you will not be happy about your flight despite the fact many things at the beginning of this trip went well.

You aren’t happy because you are wired to remember two parts of your overall experience: the peak and the ending. In psychology this is called peak-end rule. According to the peak-end rule, our memory of past experience (pleasant or unpleasant) does not correspond to an average level of positive or negative feelings but to the most extreme point and the end of the episode (Kahneman, 2000b).

Chip and Dan Heath also explore this concept in their book ‘The Power of Moments: Why Certain Experiences Have Extraordinary Impact.‘

They suggest that a peak moment requires at least one of the four elements below, with the best having all four:

Elevation: these are moments of happiness that transcend the normal course of events through sensory pleasures and surprise
Pride: these are moments that capture us at our best; whether it be moments of achievement or moments of courage
Insight: these are our eureka moments; they change our understanding of ourselves of the world and give us a moment of sobering clarity
Connection: these are moments which are social in nature; think weddings.

Evolution has built us humans to maximize our brainpower and conserve cognitive energy, by helping us avoid spending brain capacity on memories that are irrelevant and not intense. Findings supporting peak-end theory suggest that a small improvement near the end of an experience can radically shift one’s perception of the event.

If you are a business, think how can you improve last impressions about your product/service delivery or engagement. If you are about to go into a negotiation, think what the last 5-10min of your discussion should look like. If you are an event organizer, think what the last part of your event should look like.

Rethink sales incentives

Recognise the best, engage the rest

Sales incentive programs are usually aimed at the middle 60%-70% of the population. Some might say “why do I need to incentivise them, it’s what I pay them for.” If there is no gap between your objectives and the performance of the sales force you may well not need an incentive. However, if there is a gap, a well-designed sales incentive program is likely the best way to close it. And there is a reason for that.

Recognising the contribution of top performers is critical, and should be treated as an investment in retention of not only top performers but also middle. If you don’t recognise them, your competitors will. An incentive program that calls for the top 10% of sales reps to qualify for a travel award may engage 30% or so of the population. The remaining 70% feel they have no real chance to earn the award. A sales incentive program is often designed to drive increased unit sales, accomplishment of individual objectives or delivery of incremental volume. In any event, a well-designed sales incentive program will engage all participants because, unlike with a top performer program, the sales rep needs only compete with him/herself, not with the entire group. The ability to be reinforced for individual increment is what differentiates the incentive from recognition. And because top performers are just that, the increment they can generate is often limited.

Just the opposite is true for the middle 70%. Design the program with these sales reps in mind and the sales incentive will often generate more than enough incremental profitability to fund both the recognition and incentive programs.

Why it works

Studies show the most effective way to drive additional sales is to engage those in the middle of your performance curve.

Most top-tier performers are already operating at or near capacity
To gain additional sales, you need to engage the middle of your performance curve
Identify shared behaviours among your top sales reps
Inspire those desired behaviours among middle performers
Use the right mix of culturally-relevant rewards, incentives and recognition

Top 8 psychological hacks to boost you work and social interactions

1) Go into any interaction with acceptance and comfort mindset

2) Pay attention to people’s feet when you approach them

If they turn only their torsos and not their feet, it means they are in the middle of an important conversation and they don’t want you to interrupt them. If they turn both torso and feet, it means you are welcome.

3) When arguing, stand next to the person, not in front and move your eyes around

As subconsciously, this might be perceived as confrontational, and thus exacerbate the argument.

4) Show attention and understanding during conversation

rephrasing what he/she just mentioned
labelling his/her feelings using words (which has deflating and positive effect)
mirroring, i.e. repeating his/her words for more clarification/elaboration – animals mirror each other for comfort and to instil trust
nodding and using “uhm” and other silent confirming sounds
summarise in order to get “That’s right”: this will show that you heard, understood and identify with his/her issue/points and hence the answer “that’s right”
ask open-ended questions using “how” and “what”: both give a chance to the other person to elaborate and clarify, which instills further understanding for you and the longer the other person talks, the better he/she feels about you

5) Use silence in conversations

We tend to think silence is awkward. Don’t shy it, let it flow and let the other person or yourself ponder in the silence periods and then continue answering. Silence periods may seem awkward but they induce understanding and bonding.

6) Enrich your conversations

storytell: package information into stories and anecdotes (using details of colours, music, tastes, smells, movements, etc) – we are evolutionarily wired to buy into stories and trust those who tell them
tone and inflection: no one finds monotone exciting. Switch up your tone of voice from deep for declarative statements, to high inflection when you want to leave them guessing.
ask them to guess what happens next: where relevant/possible, this will create engagement and anticipation
avoid using “I think” and “I believe” where possible: instead use “I will” and “I know” to show a stronger and more confident footing

7) Use Benjamin Franklin effect

A person who has done someone a favor is more likely to do that person another favor than they would be if they had received a favor from that person. Similarly, one who harms another is more willing to harm them again than the victim is to retaliate.

In social situations, you can hack this by making someone do something small for you, then asking for your true favor. It’s such a small favor that they will say yes, and due to cognitive dissonance their brain will rationalize that they must like you enough to do you a favor in the first place. This is also called the foot-in-the-door effect.

8) Frame your request as a choice

No one likes to feel pressured into doing something they don’t want to do. By subtlety rephrasing a request, you can make the person feel like they came to the decision on their own terms.

Also this insightful blog post on overall work ethic touches on some of these and other psychological factors..

Investor’s perspective: psychology of fundraising

“A compelling narrative fosters an illusion of inevitability.”
― Daniel Kahneman

Most successful investors in the world have a good understanding of common human (cognitive) biases. Cognitive biases are ‘hard-wired’ in us, and we are all liable to take shortcuts, oversimplify complex decisions and be overconfident in our decision-making process. Thanks to these (intuitive or experience-based) insights, investors have a significantly better understanding of investment opportunities (founding teams and their projects) and are able to systematically use these (behavioural) insights for better decision making, thus improving their investment odds.

There are three aspects for investors to consider in order to select only the best investment opportunities:

Identify and guard against biases in their own (investment-related) decision-making process
Identify biases [paste link to the entrepreneur’s perspective post here] entrepreneurs may use (in their materials/deck/pitching process) to gain a more favourable view of their projects
Identify and assess founders’ biases by observing how/what they pitch

Successful investor puts looks at opportunities via each set of lenses (from above three points) before deciding to invest.

1) Identify and guard against biases in their own decision-making process

Confirmation Bias + Loss Aversion. What is it: This is the tendency for people to favor information that confirms their preconceptions regardless of whether that information is true or complete. When layered in with Loss Aversion, it creates a deadly combination. How to defend against it: Because an investor is averse to losses, he is biased against any data that suggests that the initial investment decision was a mistake and will gravitate towards information that supports a follow-on investment. Confirmation-trapped people often seek out others who have made, and are still making, the same mistake.
Risk Seeking. What is it: Even if a company is really struggling, the following logic is very appealing: wouldn’t an investor be willing to spend $2M to save the last $8M he has already invested? Because investors usually buy preferred stock, they get paid first and so they only need the company to sell for the value of the preferred stock to get their money back. How to defend against it: As a result, you often see struggling companies raise inside rounds under this logic (often crushing employees’ equity in the process). Basically, investors avoid risk when their portfolios are performing well and could bear more, and they seek risk when their portfolios are floundering and don’t need more exposure to possible losses. This is largely due to the mentality of winning it all back. Investors are willing to raise the stakes to “reclaim” capital, but not to create more capital.

Other impactful biases include:

Delayed gratification (pressure to show immediate results)
Sunk cost trap (feeling lasting attachment to costs that cannot be recovered)
Oversimplification tendency (tendency to stay within your ‘circle of competence’ even when it is clearly counterproductive or destructive)

2) Identify biases founders use to gain more favourable view of their projects

As mentioned in the article, top biases that founders may deliberately use to gain more favourable view of their pitch and project are narrative bias (storytelling in deck and pitching), clustering illusion (that causes investors to observe appealing clusters of information and credentials), confirmation bias (founder shows the ‘right’ structure and contents to investors), pro-innovation bias (investors like to see innovative features and products), halo effect (founders show, via storytelling and credentials, a positive and likeable image or treat of themselves or their product, aiming for investors to think that the overall product and team are as good), zero-risk effect (founders pre-emptively show there are no risks or all potential risks are mitigated) and distinction bias (founders like to deliberately compare their product to one that is much inferior, thus highlighting the benefits).

3) Identify and assess founders’ biases by observing their pitch

Anchoring Trap. What is it: We can be excessively influenced by a starting point or first impression. Psychologists have shown that when people make quantitative estimates, their estimates may be heavily influenced by previous values of the item. For example, it is not an accident that a used-car salesman always starts negotiating with a high price and then works down. The salesman is trying to get the consumer anchored on the high price so that when he offers a lower price, the consumer will estimate that the lower price represents a good value. Anchoring can cause investors to under-react to new information. How to defend against it: In order to avoid this trap, an investor needs to remain flexible in his thinking and open to new sources of information, while understanding the reality that any company can be here today and gone tomorrow.
False Causality Bias. What is it: Many times, we falsely assume when two events occur together that one event must have caused the other. For example, founders are prone to show and quickly get credit for their previous success (exit or company sale). However upon careful analysis of the stated “success” (which a founder assumes to repeat with this new project) may show a confluence of external factors (such as technological development, favourable legislation, government support, etc), good timing and pure luck that were more important in the stated success. PayPal and Amazon are great examples, and founders of both are very careful not to claim full credit, but deliberate on more salient factors that weren’t in their control and how the sum total of their grit, perseverance and external factors helped in their eventual success. How to defend against it: Investors need to hear out founders’ stories but also conduct a thorough analysis of the context in which the previous success of the founder happened. Goal is to distill what really caused the success; was it mostly the hard work, visionary idea and perseverance despite or rather in addition to externalities?
Fundamental Attribution Error. What is it: Whereby we attribute a person’s behaviour to an intrinsic quality of her identity rather than a situation she is in. For example, let’s say you were interviewing a financial advisor. He shows up on time, in a nice suit, and buys lunch. He says all the right words. Will he handle your money correctly? Almost all of us would be led to believe he would, reasoning that his sharp appearance, timeliness, and generosity point towards his “good character”. Dan Ariely’s book about situational dishonesty and cheating illustrates that we may give an appearance that is expected only to behave differently in a similar context. How to defend against it: Before and during the fundraising pitch, we need to dig deeper and put appearances and our expectation in a proper context, aiming to find out whether the founder and his team really have all the necessary attributes (industry knowledge, team skills, leadership, vision for the product) required to give them the best shot at successful growth and scale up of their product.
Survivorship Bias. What is it: Our tendency to focus on successful people, businesses, or strategies and ignoring those that failed. Because of this, we adopt opinions, structure businesses, and make decisions without examining all the data, which can easily lead to failure. A Google search of “Successful founders who dropped out of college,” will turn up some of the biggest names such as Steve Jobs and Mark Zuckerberg as examples of entrepreneurs who had an idea, took a leap and became successful. But by equating their success to hard work alone, we ignore a very important fact: for every successful college dropout, there are hundreds, if not thousands, who weren’t as lucky.
The founders we put on pedestals worked hard, but there were also many circumstantial events that paved their way to success. In fact, research shows the majority of the United States’ most successful businesspeople graduated college – 94%, to be exact. How to defend against it: Look out for signs such as “In following legendary footsteps of XXX,” “We have some of the similar pedigree to YYY,” “Our team’s combined experiences in this industry are of ZZZ years”, etc which all have a common denominator of “based on previous success of such and such, we think we have a good chance at similar success.” Again, a more pragmatic assessment of team, product and market related to areas where the founder or his team claims some “heavy” credentials would help understand what the reality is.

In addition to the above, biases investors can look out for in founders include:

Information bias
Framing cognitive bias
Decoy effect
Choice supportive bias
Empathy gap
Illusion of control
Overconfidence and overoptimism
Scarcity priming

Top 5 psychology tricks in sales

1. Give your prospect fewer options

Providing your prospect with too many different options makes it harder for them to make a decision – which increases the odds they’ll walk away without buying anything at all. This is due to what in psychology is called choice overload.

2. Leverage loss aversion and FOMO

Even hesitant buyers have a hard time saying no to a great opportunity – especially if they’re thinking about what they’ll lose by turning it down. You can tap into this by framing your offer as something they’ll miss out on if they don’t make a purchase, rather than just highlighting the added value. Very impactful is to make positive comparison with a competitor, which makes your offer stand out even further.

3. Ask hesitant prospects to explain their reasoning

One of the easiest ways to poke holes in a prospect’s excuse for not buying is to ask to them walk you through their reasoning.

A simple, “What’s holding you back?” can get prospects to open up about their reservations. Whether it’s a matter of budget, timing, or product fit, knowing your prospect’s sales objections gives you a chance to reframe their perspective.

Another method is to ask your prospect to rate their readiness to buy on a scale of one to ten (with one being “not ready at all” and ten being “completely ready”). Regardless of their answer, ask why they chose the number they did.

4. Use storytelling to make an impact

Sharing a relatable customer success story is more powerful than simply listing the benefits of your product. Not only does telling a story allow you to connect more quickly with your prospects (by releasing the “trust hormone” oxytocin), it also helps you motivate your audience to take a desired action.

5. Use extreme anchoring
Anchoring is so powerful that it works even when you know it’s being done to you. You’re better off setting a high anchor that skews the entire negotiation your way than letting the client set a low anchor. The anchor serves as the mental reference point throughout the negotiation. Studies have shown that the higher the anchor, the higher the final price.

3 things today: psychological hacks of investor mindset

3 things today: investors (like other human beings) use mental shortcuts (called cognitive biases) in their decision-making process.

Top three shortcuts used include:

confirmation bias (investors look for confirmation of their beliefs/values when evaluating startups and favour those with most “confirmations”)
hindsight bias (investors think past successes of founders give them a good chance for a repeat success in future)
bandwagon effect (investors jump on an investment opportunity that has other influential investors, advisors or founders with good track record).

Entrepreneur’s perspective: psychology of fundraising

The above quote is the truth. There is no one world – each of us lives in a world. And just like in anything, when it comes to money and fundraising for our projects, we live in our little world with our own idea of what an efficient fundraising process looks like. We do our research, then follow some steps we find convincing and voila! We fail. Generally speaking, startup fundraising is inefficient, lengthy and for most part fruitless, minus the few (statistical) exceptions. 95% of all startups launched die within the first 3 years, top second reason being shortage of capital. Capital is the oxygen to a startup, powering its launch and growth, and yet this oxygen turns out to be very hard to come by.

Why do most startup fundraising efforts take long time and frequently fail? Two reasons: 1) founders don’t understand, let alone incorporate, behavioural insights governing investors’ decision making process into their pitch deck and pitching process; 2) investors fail to see salient points and potential of startups thanks to lack of their time and focus, and not in small part, lack of founders’ lack of investors’ decision making process and mindset. i.e. point 1 above. One fundamental insight helps solve both issues: most decision making (of investors and human being in general) is instinctively guided and controlled by mental shortcuts (called cognitive biases), without them even being aware of those.

What are cognitive biases? Cognitive biases are mental shortcuts. They are bits and pieces of human character and behaviours that evolved over thousands of years to help us survive, initially in the context of hunter-gathering against predators and in the wild nature. While much time has elapsed, these biases are still present with us in the modern world.

Broadly speaking, cognitive biases can be split into two types: information processing and emotional biases. Information processing biases are statistical, quantitative errors of judgment that are easy to fix with new information. Emotional biases are much harder to change or fix as they are based on attitudes and feelings, consciously and unconsciously. Both types can have implications when you are a startup founder trying to fundraise because they operate to keep you within your comfort zone. The underlying belief that you’ll be safer, more secure and more comfortable with less uncertainty and risk dominates decision making. To fundraise efficiently and effectively, we need to do the opposite, by going after investors and selling our story (narrative bias), showing our vision (confirmation bias, clustering illusion) and getting them to buy into our team (halo effect) and product (distinction bias, zero-risk effect, pro-innovation bias).

Top seven biases that are critical for successful fundraising cover all aspects of successful pitch and pitching process. Entrepreneurs would be wise to incorporate these insights into their pitch decks, giving them the best shot at achieving their fundraising targets.

Narrative fallacy. What is it: humans (including investors) have a tendency to look back at a sequence of events, facts or information in a linear and discernable cause-and-effect way. Cause-and-effect morph into a story. How to apply: make your pitch deck – at least the beginning part talking about Problem, Opportunity and Solution – into an inspiring story, with clear causes, effects and inspiration.
Clustering illusion. What is it: investors tend to observe patterns in what are actually random events. How to apply it: you must showcase your team’s credentials, previous or relevant successes of exiting (or failing) startups or a successful career in an MNC, which will create a clustering illusion in an investor’s head that your team has been on a roll, and your current project’s vision will be achieved based on your team’s previous success. Also when you show traction/data to investors, make sure your case is compelling enough, even with little data using the clustering illusion to your advantage, by citing trends as validation of your vision.
Confirmation bias. What is it: investors believe what they believe based on experiences and expertise they have accumulated in startup investing. How to apply it: include all the main points investors expect to see in your pitch deck, resulting in an investor “confirming” that your project is commercially sound and to have a serious consideration of investment. Lastly, in your deck, show your present solution as consistent with investor’s prior beliefs (i.e. in line with the investor’s current former portfolio investment) and avoid contradicting any strongly held opinions of the investor during pitching.
Pro-innovation bias. What is it: novelty or “newness” are generally considered good by investors, hence showing a product innovation is a good idea. How to apply it: Pitch innovative features of your product and how they give you an edge over competitors, especially a competitive advantage. However, a caveat – investors know this well – is that you need to be very careful when pitching a business model innovation, as investors’ inclination is towards favouring business models that have proven track record, as opposed to completely new ones.
Halo effect. What is it: this is the psychological tendency many people (including investors) have in judging others based on one trait they approve of. This one trait leads to the formation of an overall positive opinion of the person on the basis of that one perceived positive trait. For example, people judged to be “attractive” are often assumed to have other qualities such as intelligence or experience to a greater degree than people judged to be of “average” appearance. How to apply it: show (in the pitch deck) or inform (during pitching) of achievements (former exit, speaking at a prestigious event, etc) in order to create a halo effect in an investor’s head, which will then colour his/her judgment positively for the overall project, and in conjunction with other factors, might lead to an investment. Also, if you can show a testimonial by a celebrity or a well-known business person of your product or one similar to yours, halo effect will do the rest!
Zero-risk effect. What is it: this is a tendency to prefer the complete elimination of a risk even when alternative options produce a greater reduction in risk (overall). How to apply it: in your pitch deck, it is important to either not show potential risks (scale up or product) or show a risk with a full mitigation of it. This is one of the main reasons that investors might not speak out or question you, but also decide not to go ahead with investment due to perceived risks in your product.
Distinction bias. What is it: this is a tendency to view two options as more distinctive when evaluating them simultaneously than when evaluating them separately. It can magnify the near meaningless differences between two very similar things to the extent they become decisive in which one we choose. How to apply it: in your pitch, compare your product with one or two competing products next to which yours has clear benefit. This comparison will clearly sway the investor to your product as a preference.

A more complete list of biases (excluding the ones mentioned above) affecting entrepreneur’s pitching ability can be found below.

availability heuristic
information bias
expertise trap
attribution error
framing bias
bandwagon effect
hyperbolic discounting
sunk cost fallacy
planning fallacy
omission bias
choice-supportive bias
illusion of truth effect
superiority bias
self-serving bias

Cognitive biases are particularly challenging for fundraising process as they have a profound impact on the creative right-side brain which is critical for creative ideas. Right brain thinking is more risky and prone to biases as it deals with abstract unknowns vs. left brain thinking which deals with more logical concrete knowns.

*This article was first published on WholeSale Investor

3 things today: survive the survivor bias

3 things today: Let’s talk about Survivorship Bias.

Why do we read and reread books/articles like “The Morning Habits of Successful People” or “The Six Characteristics All Billionaires Have in Common”? How many of these articles have you clicked on?

We love the idea that by learning about our idols, we’ll be able to emulate their success. A quick Google search of “Successful founders who dropped out of college,” gives names such as Steve Jobs and Mark Zuckerberg as all examples of entrepreneurs who had an idea, took a leap, and became successful.

But by equating their success to hard work alone, we ignore a very important fact: for every successful college dropout, there are hundreds, if not thousands, who weren’t as lucky.

The founders we put on pedestals worked hard, but there were also many circumstantial events that paved their way to success. In fact, research shows the majority of the United States’ most successful businesspeople graduated college – 94%, to be exact.

1) Better and cooler products don’t necessarily succeed – check TiVO, which is still barely alive

2) Don’t neglect external factors that influence success – see how Skechers kicked Adidas from top position

3) Just because you don’t hear you customer complain doesn’t mean they are happy – many customers leave before they complain of their unhappiness

You must consider the other variables not immediately visible to you to avoid the survivorship bias.