This article spells the right techniques in investing, even in evaluating business ideas. A copy of the original can be found here. Like investing, setting up a business entails skills, this article mentions a few of those skills that you can develop to start your way to the entrepreneurial path. For more articles on the subject of business, refer your friends to this site.
By: Rebecca Waber
A recent article in The Wall Street Journal
about Facebook’s initial public offering mentioned a small-time
investor in Chicago who had purchased $10,000 worth of stock in the
social-media giant. He borrowed more than half of that sum from his
mother. Clearly, this investor thought Facebook was a sure bet. But he’s
probably kicking himself today, as the value of the stock has dropped
more than 27 percent since its May 18 debut.
This
poor soul, like so many others, failed to judge risk accurately, and no
doubt there are myriad reasons for that. But I’d like to suggest that
one critically important factor is Facebook’s starring role in so many
people’s lives—a fact that contributes to what psychologists term the
“availability bias.”
Availability
bias is the rule of thumb whereby we call to mind our personal
knowledge of a topic in order to figure out how important it is. It’s
the reason so many people overestimate the risks of flying while
underestimating the dangers of driving, even though they’re far more
likely to die in a car crash than in an airplane accident. The latter
simply makes much bigger news.
Likewise,
Facebook produces big headlines and is on the minds of millions of
people, especially regular users. This means that many investors value
Facebook more than they should, given the facts.
Availability
bias distorts business investments in the same way, particularly when
corporations seek new growth. In deciding where to allocate development
funds, firms all too often view their core or high-profile markets as
the safest bets only because they’re familiar.
The
alternative to constraining your decisions to the familiar (or the
famous) is to ground your investments in a decision-making process that
is deliberate, not reactive:
- Focus on discovering customers’ needs. When you uncover consumer needs, you naturally create differentiated offerings with true market value.
- Pursue a long-term strategy. In an effective strategy, short-term moves should lead you toward solid long-term goals. A collection of opportunistic bets, no matter how sure they seem in the moment, is not a strategy.
- Don’t follow the herd. We’re all human, and there’s emotional comfort in doing what everyone else is doing. But stay vigilant and rigorously evaluate each investment opportunity based on its merits, not its media profile.
Rebecca Waber is a manager at the growth and innovation consultancy Innosight.
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