How to avoid 4 logical errors that harm your company

When you are an entrepreneur, logical reasoning is not only an academic exercise, but an essential tool for making good decisions. Whether you are just a month into your startup journey or you’ve got been running your business for a decade, mastering the art of sound reasoning can make a significant difference to your success.

For this reason, understanding mistakes is an neglected and undervalued business skill. Mistakes can wreak unexpected havoc on your operations and even your bottom line. What led to this was a seemingly minor error in reasoning bankruptcy in the worst case.

Here are 4 common pondering traps that I have personally encountered in over 20 years as an entrepreneur, and how they impact your business.

1. Appeal to authority

Consulting experts and advisors can provide beneficial insights, but over-reliance on their opinions without considering the context of your company can lead to the fallacy of “appealing to authority.” Just because someone is an authority does not imply their advice will fit your unique situation.

At my company, Vungle, we had a board of experienced investors with deep experience in promoting technology. Their advice was to move away from gaming, which was our primary market, and focus more on brand advertisers. In retrospect, it was a mistake. While their authority and experience were undeniable, the direction didn’t match the realities of our business – 90% of our revenue got here from gaming firms. Unfortunately, we spread too little to each markets. However, the competitor called AppLovin he overtook us, completely focusing on playing. They eventually went public and are now value over $40 billion, while Vungle was sold for $780 million. I still see our departure as a huge success, but it stays a very frustrating lesson in the dangers of following authority unconditionally.

Bottom line: you need to all the time evaluate whether expert advice is relevant to your specific situation. Combine external insights with your data and experience to ensure balanced and informed decision-making.

2. Green wood

The myth of green wood, invented by Nassim Taleb in Antifragilitywarns against overemphasizing unimportant details at the expense of more necessary aspects. Early on in my angel investing journey, I fell into this trap of focusing too much on startups with impressive products, while neglecting critical facets similar to sales, distribution, and market size. While the products themselves were higher, the lack of strong distribution channels meant these firms struggled to gain popularity and ultimately failed.

Instead of delving into technical details, focus on the key aspects that directly impact the success of your company. Make sure your product knowledge is in line with market demands and customer needs.

3. False cause

Imagine a surge in sales during the holiday season. Increasing production before the next holiday season could appear obvious. However, this is a classic example of the false cause fallacy, in which a direct cause-and-effect relationship is assumed between two correlated events without solid evidence.

To avoid this trap, all the time query the reasons behind the patterns you observe. Analyze data comprehensively to make sure you don’t confuse correlation with causation. Test hypotheses in a controlled approach before committing significant resources.

4. The Gambler’s Fallacy

The gambler’s fallacy is the false belief that past success guarantees future results. After Vungle’s $17 million Series B roundwe have significantly raised our growth forecasts, assuming that the dynamics will proceed. However, despite the intended growth of fifty%, we only managed to achieve 15% growth the following yr. Our rapid scaling presented us with challenges we didn’t fully expect, leading to disappointing results.

Although our growth doubled in the following years, this experience taught me a beneficial lesson: past performance does not determine future performance. Always base your forecasts on solid evaluation, not only recent success, and remain flexible to adapt to changing circumstances.

Avoiding mistakes for higher decision making

In the whirlwind of entrepreneurship, where every decision counts, avoiding logical fallacies might be your secret weapon to success. Don’t let flawed reasoning throw you astray – arm yourself with strategies that will improve your decision-making and keep your business on track. Here’s how to turn potential pitfalls into powerful opportunities:

• Dive deeper into the data. Don’t go by your hunches; as an alternative, use A/B testing, market research, and financial modeling to make solid, evidence-based decisions. Before you’re taking motion, test your ideas on a smaller scale to confirm their potential and minimize risk.
• Question assumptions and don’t take advice literally, even from investors or authority figures. Make sure their insights align with your day by day actions. Actively challenge default attitudes and seek diverse perspectives from your team and stakeholders who are more immersed in operational details.
• Implement a decision-making framework. Use tools similar to SWOT evaluation or cost-benefit evaluation to ensure your decisions are based on a comprehensive assessment of all relevant aspects.
• Stay up to date. Stay vigilant by learning about cognitive biases and documenting your decision-making for future reflection and growth.

Applying these practices not only increases your decision-making effectiveness, but also changes the way you approach challenges. With these tools in your entrepreneurial arsenal, you will turn logical errors into springboards to success, steering your company toward extraordinary achievements and avoiding costly mistakes.