| ign="center"> | | | | Induction problems can be hard to address--because |
| Writing a great business plan is never easy. But by | | | | oftentimes good data is so scarce during the |
| being aware of common psychological traps, | | | | business planning process. But one technique to |
| entrepreneurs, business owners and managers can | | | | minimize induction problems is documentation of key |
| improve dramatically the planning process. | | | | assumptions and plan generalizations. Keeping these |
| Accordingly, as you make plans for your business or | | | | generalizations explicit may trigger further discussion |
| other ventures, consider and work to avoid these | | | | and reassessment. |
| common mistakes: | | | | Confirmation Bias and Heuristic Affect |
| Availability Bias | | | | Confirmation bias and heuristic affect refer to two |
| Availability bias refers to the human tendency to | | | | separate but similar thinking booboos that affect all |
| base planning on data that are easily available--rather | | | | too easily an entrepreneur's business planning. |
| than on the data that's really needed. | | | | Confirmation bias is the temptation to look for data |
| In the case of a business or new venture plan, for | | | | that confirms our initial gut feel. For example, thinking |
| example, one can all too easily overweight data that's | | | | a new venture will become a huge success may |
| easily available because of personal experience in a | | | | cause the business planner to look more earnestly |
| past job or business. Or one can overweight data | | | | for bits of information that confirm this upfront |
| that's easily available because the information resides | | | | impression. |
| in some published report or white paper. | | | | The heuristic affect occurs when preconceptions |
| The obvious problem here is that availability does not | | | | corrupt the analysis of an opportunity or venture. For |
| mean relevance. The upshot? Entrepreneurs need to | | | | example, a preconception that a particular product or |
| work hard at thinking about the data they really need | | | | customer category is unprofitable may screw up or |
| for a particular plan. Then, after that, they need to | | | | screw with the calculations used to forecast profits |
| work hard to get as much of that information as | | | | and cash flows of that category. |
| they can. | | | | Mitigating confirmation bias and heuristic affect can |
| Hindsight Bias | | | | sometimes be dealt with through simple honesty. |
| Hindsight bias, another common snafu, refers to the | | | | Carefully considering the negative business planning |
| tendency to think something is more likely to occur | | | | affect of our gut feels and preconceptions may be |
| after the event has already occurred rather than | | | | the only practical way to avoid these two errors. |
| before the event occurred. | | | | Contamination Effects |
| If something good for a particular planning scenario | | | | A final, quick word about contamination effects and |
| has just occurred, most people tend to think that | | | | the business planning process... |
| particular "something good" is more likely to occur | | | | Contamination effects appear when a business |
| again. Or, if some awful thing has just occurred, | | | | planner allows irrelevant but tangentially related |
| people can tend to think that same "something | | | | information into a plan either directly or indirectly. For |
| awful" will occur again. | | | | example, an entrepreneur planning some technology |
| One way to try to mitigate hindsight basis in your | | | | venture may allow a recently read book about the |
| business or new venture plan is to carefully assess | | | | history of Microsoft or Google to deeply influence his |
| any simple extrapolations baked into a business plan. | | | | or her planning. |
| Such extrapolations often sneak hindsight bias into | | | | Avoiding contamination effects completely may be |
| plan projections and forecasts. | | | | impossible. People soak up all sorts of data and |
| Induction Problems | | | | pseudo-data all the time. But one probably wants be |
| Induction problems crop up when people make | | | | alert to the contamination effect problem--especially |
| generalizations on the basis of information that's way, | | | | when one is doing something as important and |
| way too skimpy. | | | | strategic as business planning. |
| Gross generalizations about all of a firm's potential | | | | Seattle tax CPA and author Stephen L. Nelson is the |
| customers, for example, might be made on the basis | | | | author of QuickBooks for Dummies and the MBA's |
| of a tiny unrepresentative sample. Or meaningless | | | | Guide to Microsoft Excel. Nelson is also the publisher |
| coincidences may be blown out of proportion and | | | | of the Write Your Own Business Plan web site. |
| then be "discovered" as a significant pattern. | | | | |