Getting it Wrong (5 Entrepreneurial Fallacies)

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Getting it Wrong (5 Entrepreneurial Fallacies) post image

Ray Dalio, who has been called the Steve Jobs of investing, wrote a fascinating PDF document called “Principles.” One thing that sticks out is Ray’s ongoing concern with “reality,” and his strategies for being as accurate as possible.

“Bad opinions can be very costly. Most people come up with opinions and there’s no cost to them. Not so in the market. This is why I have learned to be cautious. No matter how hard I work, I really can’t be sure.”

But who really loses more when a poor series of judgments is made? Ballin’ Ray Dalio or the aspiring entrepreneur, artist, or small business owner who wants to change their life and experience a whole new level of personal freedom? What’s a bigger tragedy– Dalio dropping a couple million, or the upstart entrepreneur not managing to get their dream off the ground?

I’ve said it myself in passing– entrepreneurs do seem to “good at reality.” Afterall, their job is to manipulate it. That’s what we mean when we say “create results.”

Dalio’s “Principles” got me thinking of some of the most common entrepreneurial fallacies that keep us from the truth. Here’s 5 I came up with, let me know if you can think of more.

Diagnosing business and life problems with non-falsifiable statements.

A non-falsifiable statement is one that cannot be disproven. All swans are white” can be falsified if a black swan could be found, but “this photo is beautiful” is non-falsifiable. There isn’t a particular piece of data that would, in-theory, change your mind. Jeff Bezos said recently: “people who were right a lot of the time were people who often changed their minds. By ensuring that you use falsifiable statements to diagnose business problems, you keep yourself open to data and experiences that can change your mind.

“Everything happens for a reason.”

Unfortunately this isn’t often used with ruefulness or jest like c’est la vie!  The “everything happens for a reason” attitude asserts that the purpose of outcomes will be revealed to us in good time. This perspective pre-disposes the speaker to a ‘suck it up’ mentality. Why not instead try and discover the truth of the matter and try to discover increased level of control in the future?

Mistaking objectives for strategic actions.

Business owners often lay out their quarterly objectives with no mention of the strategy that they suspect will achieve them. I’m going to make $4500 in personal income by the end of March isn’t a particularly useful objective if it isn’t accompanied by a strategy that you can test and measure.

Instead, accompany your objective with a concrete strategy and a time to stop and test for effectiveness. I’m going to make $4500 in personal income by the end of March by attending twice as many conferences over the next quarter. My data says that’ll add 10 more customers to my roster, and with that workload I won’t need to increase my operational costs. At the end of the quarter, I’ll measure my progress.

Don’t forget the cost of implementing your strategy, especially if your objectives are income or profit oriented.

Essentializing ourselves and our roles in organizations.

Being a business owner is a consistently humbling and often confusing experience. On the one hand, we are supposed to be driving the whole thing. On the other, once businesses get started they can often take on a life of their own. Although I’ve taken the same actions in a large number of product niches, I’ve encountered an almost equally large range of outcomes. I’ve lost money, made money,  made people mad, made people happy, and operated under false pre-tenses there. Often people who’ve been trying at business for a few years and failing put much of the burden on themselves when it’s actually market conitions that are preventing their success. Why try to change yourself when you can change your venue? 

Confusing relevant experience (intuition?) with taste.

Sometimes going with your gut can be great, and other times it can be disastrous. One of the coolest things about having a business is that it provides you with a relatively small and propriety version of reality. You’ve got proprietary data and customer information– stuff that tells you how reality works– and over the years that can lead to a solid entrepreneurial intuition. I find I struggle with this a lot. Intuition at it’s best is an incredibly powerful tool for making judgements. How do we separate that from our opinion, which it has been well documented, means very little when it comes to the success of our endeavors? :)

Those are just some that came to mind. I’d love to hear if you know about any other entrepreneurial fallacies.

Cheers,

Dan

PS, here is a download link to Ray Dalio’s “Princples.”

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Published on 11.20.12
  • http://www.jonmyers.com/ Jon Myers

    Good stuff – I’ve got one – “Just follow your passion.”

  • http://www.beachheadmarketing.com/ Steven Moody

    Looking to others (investors, mentors, partners) for approval. The only score that matters is the money people are willing to pay for your offer

  • Jono Slade

    “If you build it they will come” building a product in the hopes of creating a market.

  • Piers | Kickstarters’HQ.com

    Gotta mention the obvious one: “Shiny Object Syndrome” in the form of “I tried niche X for two whole days/weeks/months and I’m not rolling in money yet! Therefore it didn’t work and I should try this other, newer niche / marketing trick I just heard about…”

  • Rich

    The book “Just Start” is great for this stuff. They get into the “Good at Reality” thing quite a bit in there:-

    The book’s based on research into entrepreneurs and how their mindset differs from normal people. One difference they found was was that Entrepreneurs take smart steps (e.g. Little Bets) which are very rooted in their assessment of exactly where they are at and how things are.

    Another fallacy highlighted in that book is the “Prediction” fallacy – the idea that extensive market research and predictive models are useful for entrepreneurs. Often times when you’re creating something new, by definition you’re facing the unknown – if it (or your variation) has never been done before, predictive models are inappropriate.

    So the answer is not Prediction, but instead quickly figuring out your Acceptable Loss – if the cost of the opportunity (in time, money, energy) is below what you’d be willing to lose trying it out, then you jump in and take the action (based on desire and an intuitive assessment of “how things are”). If the cost of the action is high, you only take action if you can figure out how to get it under the acceptable loss threshold. It’s all done quickly, decisively and back-of-the-envelope.

    So entrepreneurs either get a good result, or pay a (pre-determined) acceptable price for the lesson learned. And they end up taking a sh*tload more action than someone using a “Prediction” framework.

    Great book… really recommend it.

  • http://www.DIYDROID.com/ Brandon Nolte

    This is one that Dan mentions on the podcast all the time. I think it’s so popular, because it’s such an appealing idea. Hell, if I could make money doing my obscure hobbies I would too. But, you’re right, you have to make sure that other people will pay for those ideas/products or else your just wasting your time trying to “make it”.

  • http://www.diamantisdesign.com/ ilias diamantis

    Hi Dan !

    Sometimes we see the successful end result but we fail to see the journey that led there. Or we see only a part of the process .
    So lots of times we miss that special ingredient that make people successful, that secret sauce that’s called work.

    Another one which goes with it is making excuses. If only I had more money/time/connections etc.

    No man ! If only you had more will, determination and persistence . And working hard wouldn’t hurt either.

    Be healthy and smile .

  • http://stankavich.com Mike Stankavich

    Finding better tactics will inevitably lead to success. Seems like many would-be entrepreneurs get stuck in the trap of endlessly searching for better tactics without focusing on the underlying value proposition of their offer. “If I could just find that secret that Dan Andrews is using to drive traffic to his website…” It’s seductive, because it lets you avoid the real work of understanding your market and shaping your offer to meet its needs.

    I don’t mean to suggest that tactics don’t matter. Of course they do. But tactics are tools for refinement and continuous improvement. Good tactics alone cannot build lasting value.

    This is definitely related to the Shiny Object Syndrome that Piers mentioned.

  • John Neil

    Trying to get passive income before pulling in active income.

    Fallacy? Maybe not. Mistake… I’d say so

    Justin covered it here: http://adsenseflippers.com/internet-marketing/screw-passive-income/

    David Allen (GTD author) said he consulted for __five years__ after deciding to write the book. He did it just to get his process polished. Said it on this podcast: http://smallbusinessbigmarketing.com/david-allen-getting-things-done/

  • http://www.tropicalmba.com Dan

    Ah yes! Solid. We could call that the “Field of Dreams Fallacy”

  • http://www.tropicalmba.com Dan

    +1. “Permission seeking lame-bot fallacy.”

  • http://www.tropicalmba.com Dan

    Yeah I love it, it’s so easy to underestimate how long it’s going to take to get relevant data and feedback from a business project.

  • http://www.tropicalmba.com Dan

    Hey Rich… thanks for sharing that, that’s a nice alternative perspective there… I love the idea of considering acceptable loss, I never looked at it that way explicitly. I’d added the book to the TMBA reading list. Thanks!

  • http://www.tropicalmba.com Dan

    haha, I have a note in my writing folder that says “THERE IS NO SECRET SAUCE!!!” … so we are on the same page there.

  • http://www.tropicalmba.com Dan

    that’s a great one Mike, this happens when we ‘essentialize’ or can’t get off a business for whatever reason … maybe when we aren’t clear about fail points. this is a solid one. i should re-write the post with all these ideas!

  • http://www.tropicalmba.com Dan

    Mistake ‘fo sho!

  • http://www.tropicalmba.com Dan

    I’m passionate about responding to this comment :P

  • http://www.tropicalmba.com Dan

    yeah, that’s so 2010. :)

  • Agota

    Here are three wantrepreneurial fallacies that I see quite often:

    #1. Getting your business knowledge from self-help books. Many people read self-help books that give very vague business advice (“be yourself”, “follow your passion”, “find your purpose” ) and then try to build their businesses with the vague mindset they got from those books. This phenomenon produces a lot of people who want to quit their jobs to start a business, when the reality is that they don’t even know what terms like unique selling proposition, target audience or features vs. benefits mean, which clearly shows that they are setting themselves up for some financially tough times.

    #2. Denying that you are in business. Many people who have a calling (for the lack of a better word) want to build their lives around it, but have a strong resistance to the idea of making decent money from that (usually because they feel like that would be “selling out”). Consequently, they often start small businesses, but refuse to treat them as such. That’s how you get starving artists and struggling martial arts coaches.

    #3. Assuming that it’s easy to create passive income. Many people are not aware how much time and energy it takes to set up legitimate sources of passive income. Very few people realize that you’ll have to work your socks off for months or even years in order to be able to make money while you sleep. I’d like to see more people talking about what it actually takes to get there as opposed to how cool it is to be there.

  • Agota

    On a more serious note, I think not validating your ideas is a common mistake among entrepreneurs. People often come up with a “cool idea”, then spend tons of time, energy and money to create the product/service, only to find out that nobody is willing to pay for that. In most cases, it’s quite easy to run a cheap test and see before hand whether there is enough interest to justify creating something.

  • http://www.linchpin.net/ Damian Thompson

    I love the fallacy of the “BIG idea”.

    Essentially the incorrect belief that you have to have a unique, never been done before, game-changing business idea to succeed.

    The most successful businesses I see and the entrepreneurs whose hustle I admire are imitators and iterators.

  • http://www.tropicalmba.com Dan

    yes! that’s a great one. it’s funny too given how many data points in our everyday life that would seem to argue against this. best place to set up a taco stand? next to another taco stand…. and so on…

  • http://www.tropicalmba.com Dan

    Hey Agota your comment just as good as the original post! i love the social subtlties that come up with #2… a lof of people talk as if they were in an alternate universe… i saw so much of this as a musician… it’s such an incredible and fascinating self-sabotage… i want people to hear my music… but not *really*

  • Joseph Hughes

    Mike, I can relate to this big time, and I’m definitely guilty of it. These tools and tactics, many times, are Resistance rearing its ugly head. As a business owner, it’s difficult to find the balance between digging into these tools and making them work for your business, vs. building your business in such a way that it can survive, and thrive, without all of the fancy tools.

  • http://twitter.com/CCAnsbjerg Cristina C. Ansbjerg

    Rip, pivot and jam!

  • Brendan Tully

    Agreed, like going to the gym – you can spend all the time in the world researching fancy tactics and techniques but at some point you gotta pickup that bar and lift, the winning fundamental is reps.

    Same in business, 99 times out of 100, the difference between the successful entrepreneur and the loser is reps….a lot of people mistake the outliers for the norm and totally miss the fundamentals that truly make success

  • http://www.tropicalmba.com Dan

    I like that line: “the winning fundamental is reps.”

  • http://camcollins.com/ Cam Collins

    “Not knowing when to quit” – I know this is so Seth Godin but there is a corollary to this. “Help your team understand that quitting is NOT failing”.

    Failure is when you give up on your vision. Strategic quitting is deciding when the effort and resources you are putting into a particular project could be better used elsewhere. Your team needs to understand or even help decide upon the “quitting parameters” too. e.g. We will spend $X,XXX on this project and if we don’t see “a return” by $date we bail. I’ve started and quit lots of stuff. I used to consider them failures. I now set-up guidelines for when quitting is the right choice. If we don’t believe we can be #1 in our market at something or achieve a certain level of profitability, we quit.

  • http://www.facebook.com/kenneth.vogt1 Kenneth Vogt

    Here are a few more:

    1) “Build it and they will come”
    The better product/service does not win. The better marketed product/service does, even if it is largely inferior to the better but poorly marketed product/service. That doesn’t mean you can get away with an insufficient product/service but it does mean you can make it if you meet the market’s needs *and* you get the word out.

    2) “My idea is so great it will go viral”
    This is not a marketing plan, it is a fantasy. There is a lot of talk about virality (is that a word?) but the fact is it primarily happens (if it happens) out of your control. If you are counting on viral buzz, you will be a victim of point #1. Don’t believe it? Ok, list off all the companies and entrepreneurs you know of that have repeatedly gone viral. It’s a short list, isn’t it? Why isn’t it everybody? Because it is very hard to pull off with name recognition and almost impossible without it.

    3) “I am good at what I do so I will be good at running a business doing what I do”
    Being a carpenter and running a carpentry business are totally different skill sets. If you don’t educate yourself on the baseline business skills, you are doomed.

  • http://www.tropicalmba.com Dan

    Yes, this is one of those maxims that even when you know it it’s difficult to follow. Another one I’ve seen a lot of trouble with is “don’t take money from assholes.”

    But…. money…..

    :P

  • http://www.tropicalmba.com Dan

    Spot on. Traditional f-ups here for anyone interested in #3 worth taking a look at the e-myth, basically how craftspeople and technicians (viz people who are good at stuff) end up baking themselves into their businesses.

    occupational hazard for entrepreneurs to be good at stuff! :D

  • http://twitter.com/JohnMcIntyre_ John McIntyre

    To bring up a similar point to Damian, I used to think it was about talent, intelligence, being lucky or having a great idea (or insert some other excuse).

    These days, I think it’s mostly about putting in the time. I’ve met some really smart entrepreneurs and some really dumb ones. That tells me that it’s not about intelligence. Intelligence might help (and occasionally it hinders), but nothing in the world moves if we don’t.

    I thought the Fastlane Millionaire book was an average book, but the idea of “event vs process” thinking highlights a similar issue. An overnight success always has years of experience behind them.

  • http://www.tropicalmba.com Dan

    +1. I’ve got a lot of similar anecdotal points, part of the reason I’ve gravitating to the ’1,000 day principle.’ all things being equal, “days in the saddle” is a great metric to find out where people are.

  • Joshua Dyer

    For the best analysis of the intuition vs opinion/bias problem, see Malcolm Gladwell’s “Blink”. This is basically what the book is about, and he integrates a large amount of data that would otherwise seem somewhat paradoxical. Highly recommended if you need a hand figuring when to trust your gut, and when to doubt it.

  • http://www.tropicalmba.com/ Dan

    Hey Josh appreciate the tip there, agreed it’s a good read!

  • Joshua Dyer

    I had a feeling you would have read it already! Should have trusted that “intuition”!

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