Published in the San Diego Union-Tribune, April 29, 2024
by Neil Senturia
Everyone has idols.
When I worked in Hollywood, I wanted to be Frank Capra or Preston Sturgess. When I transitioned to real estate development, I wanted to be Frank Gehry. And when I transitioned again (transition is a word for you were either fired, quit or couldn’t find a job) to entrepreneurship, I wanted to study only one person — Dan Kahneman. He died at age 90 a few weeks ago. He is the father of behavioral economics.
He asked and answered the simplest question — why do people do stupid things and often act in their own worst self-interests?
I admired him and read every book he wrote. After all, he was Jewish and neurotic, so was I. Maybe that would translate into his success becoming mine. That unfortunately was not the case. I will not recount his life. It was amazing and if you are interested, that is why we have Wikipedia.
In thinking about entrepreneurship, his observations are critical. A famous Harvard Business School study interviewed 100 venture capitalists and asked them what was the primary reason they observed when their companies failed. Their answer was — the founders couldn’t get along. Also from the study, “Four out of five entrepreneurs are forced to step down from the CEO post at some point.”
Jason Zweig, a columnist at The Wall Street Journal, said that Kahneman viewed himself as an outsider. “He embodied the ultimate form of self-knowledge: to distrust yourself above all.” With appropriate acknowledgment to Danny (that is what everyone called him), I wrote a rule in my first book, “More money is lost through neurotic behavior than from bad business decisions.”
And trust me, I know whereof I speak.
I recently attended an event where a dozen companies described their technology and road map, etc. In the room were a group of investors representing perhaps a half- billion dollars of potential follow-on financing. At the end of the presentation, I asked the head guy if the company CEOs had practiced their pitches in advance. Not that he was aware.
Seems obvious. After all, actors rehearse before going on stage.
Every investor talks about the importance of the team, but the hardest part is probing the chemistry in the founder/co-founder DNA. When they are running out of cash, do they cut the burn rate or double down? How positive are they when they are challenged?
Recently, I had lunch with my old pals from VCs in a Van. A problem was on the table. How should they deal with a jerk lawyer, an unfair cram-down financing and a management that wants to bail? I don’t know the final answer but think about it. The issue is always the same — people.
Think about assumptions. I had a conflict with a vendor. I felt that I had not gotten what I bargained for. The dispute centered on a difference of $3,200. I teach negotiation so I made him a deal. You pick any number between the full amount you billed and my offer.
Brilliant, put the onus on the other guy. My assumption is that he would see my argument, acknowledge my feelings and choose fairness and split the difference. Nope. He came back at $3,150, and I wrote him a check. So much for my understanding of human behavior.
I have invested with founders who swear they are mentorable, open to coaching, anxious to build a strong company. After the check clears, their phone is turned off.
My next company is going to develop a self-awareness scale that measures the tendency to engage in borderline irrationality, the inclination to behavior dysfunction.
Kahneman pointed out our biases, our misplaced assumptions. One of his key insights is “base rate.” Before you start anything, he says “you should begin every major decision by figuring out the objective odds of success, given the historical range of outcomes in similar situations.”
If you do that, and even if the odds are dicey, it doesn’t mean you shouldn’t try. It just means you need to be realistic in measuring your optimism. I know, I know, someone does win the lottery, but a healthy dose of math will focus a bright light on rational risk/reward.
I love Danny Kahneman.
Rule No. 805: “Nothing in life is as important as you think it is, whileyou are thinking about it.” — Dan Kahneman