Cognitive bias is a term used in psychology to describe how our personal biases influence our thoughts, feelings, and behaviors. These biases can harm business when they lead us to make decisions based on inaccurate information or assumptions. From my podcast interview with Dr. Gleb Tsipursky, a cognitive neuroscientist and a behavioral economist, author of best-selling books, amongst them is Never Go With Your Gut and the founder and CEO of Disaster Avoidance Experts. I want to explore three cognitive biases in more depth and share some tips on overcoming them.
What is Cognitive Bias?
The idea of cognitive bias was formed in the 1970s by Amos Tversky and Daniel Kahneman, psychologists who studied why people have trouble reasoning and judging fairly in particular circumstances. Paul Slovic, a psychologist, collaborated with them on their early findings, which they published in “Judgment Under Uncertainty.”
Cognitive bias is a term used to describe certain mental mistakes caused by our limited capacity to analyze information objectively. It can result in illogical and baseless judgments and an inability to assess risks and threats.
The researchers explained that cognitive bias is the inclination to make judgments or take action illogically due to our attitudes, memory, socialization, and other personal traits. There are several biases that have an impact on a wide range of activities, including decision-making, evaluation, beliefs, and social interactions.
According to Dr. Gleb Tsipursky, cognitive biases are “mental errors humans make in processing information because of how our brains are wired. These lead to judgments that deviate from a rational and unbiased perspective.”
Cognitive biases can be subtle and hard to detect, which is why it’s essential to be aware of them. Here are some common cognitive biases that Dr. Gleb discussed:
3 Cognitive Biases Hurting Your Business
There are many different cognitive biases, but here are four of the most common ones that can hurt your business:
The planning fallacy is a cognitive bias that leads people to underestimate the time, costs, and risks associated with future actions. Kahneman and Tversky first proposed the planning fallacy in 1979. They explained the phenomenon by suggesting that people focus on the most optimistic scenario for a task rather than using their experience of how long it actually takes.
The planning fallacy occurs regardless of our experience with similar tasks in the past. Even though we know the task has always taken longer to complete, we still underestimate the time it will take in the future. This bias can lead to problems because it can cause people to Undertake projects without realistic expectations about the time and resources required.
As a result, the project is more likely to be delayed, over budget, and less effective than initially predicted. The planning fallacy is a common source of error in personal and organizational decision-making, and it’s important to be aware of it to avoid its effects.
This is evident in Dr. Gleb’s example of an entrepreneurial company that opened to address the issue of the planning fallacy. They were making overly optimistic estimates on how much something would cost when bidding for a heavy manufacturing project. This often led to underbidding by millions forcing them to make fewer profits than anticipated. The reason why this happened is that they didn’t take into account their previous experiences with similar projects. In other words, they didn’t have a reference point to go off of and cognitively biased themselves.
One way to overcome the planning fallacy is by using reference class forecasting. This is a method of estimating the probability of future events by looking at similar events in the past. Using this method, we can avoid cognitive biases and make more accurate predictions.
Sunken Cost Fallacy
The sunken cost fallacy is a cognitive bias that dictates our decision-making. It tells us that we should continue investing in something as long as we have already invested so much, regardless of whether or not it is actually worth our time or money. This bias can lead us to make suboptimal decisions in our personal and professional lives.
For example, we may stay in a dead-end job because we have already put so much time into it, or we may continue investing in a failing business because we can’t bear to see our initial investment go to waste.
The sunken cost fallacy dictates that the more we have invested in something, the more reluctant we are to give it up. However, sometimes the best course of action is to cut our losses and move on. By acknowledging the sunken cost fallacy, we can be more mindful of its influence on our decision-making and avoid making choices that are not in our best interests.
The Optimism Bias is the cognitive bias that causes people to believe that they are more likely to experience positive events and less likely to experience negative events. The optimism bias is often seen as a positive thing, as it can help people remain hopeful under challenging situations and persist in the face of setbacks. However, the optimism bias can also lead people to make irrational decisions, as they underestimate the likelihood of negative outcomes.
For example, Dr. Gleb shares about a tech startup founder who was to get coaching from him once his company’s equity reached $10 million. However, during the SWOT analysis that Dr. Gleb conducted, the entrepreneur failed to list delegating tasks effectively as an area of weakness. Though it was clear that this was a point of concern for many investors, he was very defensive when confronted with the issue. It wasn’t until Dr. Gleb showed him how his optimism bias was harming his company that he was able to let go of control and allow other people to do their jobs. Without this guidance, many entrepreneurs make the same mistake, and their businesses suffer as a result.
Overcoming Cognitive Biases
Cognitive bias is a powerful force that can majorly impact your business. This type of bias occurs when our brains make judgments and decisions based on emotions or past experiences rather than logic or reason.
To overcome these biases and make more informed decisions, it’s essential to be aware of them and understand how they work. We’ve outlined three cognitive biases that are particularly harmful to businesses and provided tips for overcoming them. Are you ready to start making better decisions for your company?
Making a career change can be daunting, but it can also be very rewarding. If you are looking to switch to becoming a fractional executive, there are specific steps you need to take to make the transition as smooth as possible. Based on my interview with John Arms, the co-founder of Voyager U, a learning platform for executives who want to chart their career paths, I’ve weaved together the tips below for moving into this new career role. Follow these tips, and you will be on your way to success!
What is a Fractional Executive?
A fractional executive is a business professional who provides expertise on a part-time or project basis. This type of arrangement is often used by small businesses or startups that can’t afford to hire a full-time executive but still need access to high-level talent. Startups may benefit from hiring a fractional executive since they can now access the talent they couldn’t previously afford. A fractional executive is just the right leadership level to lead the firm through this critical early phase.
A Fractional executive, unlike a consultant, does more than just offer suggestions. They stay around to ensure that their plans are implemented and that their clients’ businesses develop over time.
Fractional executives fulfill essential C-suite management responsibilities, including Chief Product Officer (CPO), Chief Marketing Officer (CMO), Chief Financial Officer (CFO), Chief Information Officer (CIO), and more.
Individuals come loaded with prior experience and have typically held one of these jobs in a full-time position during their careers.
Is the Fractional Executive Role for You?
The Fractional Executive role is perfect for those who desire to lead and are looking for an opportunity to take on more responsibility without a full-time commitment. If you’re feeling unfulfilled in your current position or are interested in exploring a new career path, becoming a Fractional Executive may be the right move for you.
Not everyone is suited for fractional work. If you want the stability of a consistent team and job for an extended time, a full-time position may be preferable. However, fractional employment comes with its own set of advantages. Here are some questions to ask yourself to see if this is the right fit.
- Do you wish to have more control over your time and scope of work?
- Do you want to work with a variety of teams and organizations?
- Do you like the idea of being paid for performance rather than time spent working?
- Do you want to work with early-stage companies and entrepreneurs?
- Do you like having a variety of projects going at once? Do you enjoy working on several ideas at the same time?
If you answered yes to any of these questions, fractional executive work might be a good fit for you. As a fractional executive, you’ll have the opportunity to control your work schedule, take on more responsibility, and be paid for your results. If you’re interested in transitioning to this type of work, here are a few tips to get started.
3 Components of How to Get Started as a Fractional Executive
As a fractional executive, your success is pegged on the clients you bring in and the projects you work on. How do you get started? How do you find clients that are the right match for your skills and services? How do you identify potential projects? Below are three tips to get started as a fractional executive:
John Arms noted in the podcast interview, “every business that succeeds has a pipeline and operates a pipeline and has some discipline about it.“
Great fractional executives are disciplined about their sales pipeline. They know how many deals they need to close every month, and they work backward from there to ensure a consistent stream of new business. If you want to transition into a fractional executive role, start by being laser-focused on your sales pipeline. How many deals do you need to close monthly to hit your targets? How can you ensure a steady stream of new business? By being disciplined about your sales pipeline, you’ll set yourself up for success in this new career role.
One of the best ways to transition into a fractional executive role is through micro networking. This involves connecting with people in similar roles or who have made a similar career transition. You can make these connections through online platforms like LinkedIn or by attending industry events. In fact, according to John Arms, “leads come from smaller communities and more intimate conversations.“
Micro networking allows you to build relationships with people who can provide advice, insights, and connections that can help you make the transition into a fractional executive role. It’s also a great way to learn about open positions or companies that may be hiring fractional executives.
So, if you’re interested in becoming a fractional executive, start by connecting with people already in similar roles. Attend industry events, join LinkedIn groups, and participate in online forums. By building relationships with like-minded individuals, you’ll be one step closer to transitioning into this exciting career role.
Referability is critical for fractional executives. After all, the whole point of having a fractional executive is to have someone who can come into a company and quickly make an impact. How do you become referable? Start by becoming an expert in your field and develop a strong network of contacts. But being referable goes beyond just your technical skills and ability to network it’s about your superpower.
Your superpower is what makes you unique and special. It’s the thing that sets you apart from everyone else. When thinking about your superpower, ask yourself what it is that you do better than anyone else. John gives an example of himself that he is a CMO with a superpower of being a storyteller, which is highly referable. If a customer comes up to your network and says, “Our brand is terrible, we are all over the board, it’s a mess, ” someone will say, ” I know just the person.”
When you become referable, people will want to work with you because they know that you will be able to deliver results. And that’s how you become a fractional executive. You start by becoming an expert in your field and developing a solid micro-network of contacts, but you also need to have a superpower that sets you apart from everyone else.
So, if you’re looking to make a career change and want to become a fractional executive, start by doing your research. Find out what companies are hiring for your skills and reach out to them directly. Use your network of friends, family, and colleagues to find leads on potential jobs or connect with people who may be able to help you in your job search. And finally, don’t be afraid to ask for help! Plenty of resources are available to help you transition into a new career role, so take advantage of them.
There is no one-size-fits-all answer to the question of what matters most in generating entrepreneurial prosperity. However, after my interview with Ali Nasser the founder and CEO of Altru Vista, a wealth management firm based in Houston, Texas, and a talented writer of “The Business Owner’s Dilemma,” I wanted to summarize my takeaways from what Ali shared with me, i.e., the six key elements that are necessary for constructing enduring prosperity. In this blog post, we will explore each component in-depth and examine how you can apply it to your own business. Are you ready to start creating real wealth? Let’s get started!
The exit strategy is the planned disposition of a business by its owner. An exit strategy facilitates the transition of ownership and control of a business from one person to another. It is important to have an exit strategy in place so that you can maximize the value of your business when you sell it.
There are several options for exit strategies, including selling the business to a third party, passing it on to family members, or taking the company public. Each option has its own advantages and disadvantages, so you need to consider which one is right for you carefully.
The most important thing is to have a plan in place so that you can maximize the value of your business when you do sell it. Exit strategies can be complex, so it would be best to seek professional advice to ensure that you get the best possible outcome.
One crucial component of entrepreneurial wealth is a “legacy strategy.” This is the process of creating something that will last beyond your lifetime. It’s about building a business or investing in something that will have value long after you’re gone.
You can do this through several different strategies, but creating a family business is one of the most common. This can be a great way to ensure that your wealth continues to grow and provide for future generations.
Another way to create a legacy is to invest in real estate or other assets that appreciate over time. This can be a great way to build long-term wealth, but it’s essential to ensure that you’re investing in something that will go up in value.
No matter what strategy you choose, it would be best if you had a plan for how your wealth will continue to grow after you’re gone. This is one of the key components of entrepreneurial wealth.
Strategic Tax Plan
As an entrepreneur, it’s crucial to have a strategic tax plan. This will ensure that you’re not overpaying in taxes and taking advantage of all the deductions and credits available to you.
A good tax plan will also help you maximize your wealth by minimizing your tax liability. By reducing your taxable income, you’ll be able to keep more of your hard-earned money.
There are a few key components to a good tax plan:
- Know your tax rate and how it applies to your business income.
- Understand which deductions and credits you’re eligible for.
- Stay up to date on changes in the tax code.
- Stay organized and keep good records.
If you can master these four components, you’ll be well on your way to minimizing your taxes and maximizing your wealth.
Balance Sheet Strategy
The strength of your balance sheet directly impacts your ability to weather difficult times and take advantage of opportunities. A strong balance sheet gives you the flexibility to invest in your business, make acquisitions, or pursue other growth initiatives.
Your balance sheet strategy should be focused on two key objectives:
- Minimizing your debt burden
- Maximizing the value of your assets
There are several ways to achieve these objectives, but two essential components of any balance sheet strategy are maintaining a healthy cash reserve and investing in business assets that appreciate value.
One of the first things you need to do when thinking about your wealth strategy is to consider how liquid your assets are. That is, how quickly and easily can you convert them into cash? For example, if you have a lot of money tied up in real estate or other investments, it may take some time to sell them and get the cash you need. On the other hand, if you have a lot of cash in the bank, you can access it immediately when you need it.
Your liquidity strategy is crucial because it will help you weather any unexpected financial challenges that come your way. If you know you can quickly and easily access cash when you need it, you’ll be less likely to panic and make rash decisions when an emergency arises.
Asset Protection Strategy
As a business owner, you need to have an asset protection strategy in place to protect your wealth. This includes having the right insurance coverage, setting up LLCs and trusts, and knowing how to use asset protection strategies to shield your assets from creditors and lawsuits.
An asset protection strategy is not just for the wealthy. Any business owner can benefit from having one in place. If you don’t have a strategy in place, you could be putting your assets at risk.
Asset protection is an integral part of wealth management. It’s not just about protecting your assets from creditors and lawsuits. It’s about preserving your wealth for the future. A well-designed asset protection strategy can help you do both.
Entrepreneurial wealth is not just about making money; it’s also about having a plan to keep that money and make it work for you. By implementing the six components of entrepreneurial wealth, you can create a strategy for building lasting wealth and security. Even if you’re not ready to start your own business, these principles can help you protect your current assets and grow them over time. Have you put together a plan for your entrepreneurial wealth? If not, now is the time to get started!
Many people are hesitant to make the leap to using Fractional Leadership. How can someone understand the business if they’re not there full-time? How can someone drive accountability and results in a team they hardly see? How can someone be part of your leadership team when they’re not physically there? Here are some answers to these questions.
Understanding the Business When They’re Not There Full-Time
How can Fractional Leaders (FLs) understand your business well enough to effectively act as a member of the leadership team when they’re not there full-time? Why are they no better than the “drive-by consultants” who do their best to meet with as many people as they can to understand the company but who, through no fault of their own, rarely get it?
The difference is that FLs embed themselves within your company, whether they’re with you physically or virtually. FLs aren’t drive-by consultants because they become part of your leadership team. They collaborate with the other leadership team members consistently and work week in, week out (or month in, month out) with the team or function they lead. They get to know your business, people, and culture over the months or years you work with them.
They do not simply state their opinion after an investigation. They do not supplant your team’s culture, your knowledge of your market, and your experience. Instead, they use what they know works from their experience to focus and concretely implement the knowledge you and your people already possess through a far more effective execution than you had before.
Let’s make this more concrete. I began working with a wood flooring installer as their Fractional Integrator. Two of the leadership team members had quarterly goals related to documenting certain core processes that were unclear and inconsistently applied at the time. This caused tremendous frustration. One process related to collecting A/R, and the other had to do with how to install certain types of flooring most effectively.
I’m not a flooring expert. I’ll just put that out there at the outset. It doesn’t matter. I’m good at documenting processes and figuring out the best way to create accountability around executing those processes. I don’t need to understand the nuances of flooring installation to channel the knowledge of the head of operations into a short, two-page process document.
I showed him how to implement a couple of simple metrics to ensure that once the operations team was trained on that process, they were held accountable for executing the process the right way, every time.
When the Cat’s Away…
How do you ensure that the team members don’t fall back into old habits and do things the way they’d become ingrained to during the 80 percent of the time the FL isn’t around?
This is a great question, and it has a simple answer. FLs know from experience that you don’t create effective teams and core functions of the business by hovering over people to ensure they do things right. In startup mode, business owners want to make sure that every part of their new company is working well, so they hover. Many business owners and leadership team members simply assume that’s how it works in larger companies, just on a larger scale with more managers overlooking more people’s work. But that’s not the best way to get results.
FLs create effective teams by creating accountable teams who don’t need a helicopter manager. They do that by first ensuring that the team is made up of the right people who share the work style and core values of the company. Next, they define the team’s process and set weekly metrics and goals which track those processes to create accountability around execution. That’s it.
Let’s say you retain a Fractional Chief Sales Officer (FCSO) who puts in place a new sales process and implements a CRM to create visibility, accountability, and reporting around sales. He or she creates metrics in the company’s chosen CRM for leads entered, outgoing emails sent, demo calls conducted, and sales closed, each with a specific minimum threshold to be considered on track. If someone on the team doesn’t use the CRM to enter leads or send outgoing emails or log demo calls, they won’t make the numbers to which they are held accountable at the weekly sales meeting with the FCSO. It’s that simple.
Fractional Leaders don’t have to be physically with the team all the time as long as they set up a system of accountability and hold people to that system. They train, answer questions, mentor, and perhaps sit in on calls or listen to recordings when they’re with the team, thus driving effective execution without needing to be there full-time.
So, you see, the Fractional Leadership structure, by its objective alone, successfully negates any perceived or potential pitfalls that might come with hiring a typical contract or temporary executive leader to help with your business goals.