How To Not Think When Thinking About Making an Investment

Christopher Graves, K Street Capital Investor & Founder of the Ogilvy Center for Behavioral Science, discusses Human Behavior in the context of venture investment.

We are still wired the same as our ancient ancestors –instinctual decisions awarded for speed over accuracy. Ie, see big predator >> RUN, Stomach rumbling >> EAT.

Well, VC isn’t awarded for how fast capital is deployed but for how well. Last week, in a K Street Capital event, Christopher Graves, KSC investor and Founder of the Ogilvy Center for Behavioral Science, helped our investor-base think about how we can make better decisions.

Our caveman wiring doesn’t just push us to make quick low accuracy decisions. We also don’t like change, are overconfident in our abilities, and would rather avoid losing than winning. See Daniel Kahneman’s “Thinking Fast and Slow” for more detail on the topic.

This pre-wired decision filter, compounded by our natural sense to be tribal, can lead to an echo chamber of ideas and a tendency to underestimate risks.  

While we can't rewrite this built-in survival code, by knowing these biases, we can at least face them. We can train ourselves to be more mindful when facing new investment decisions.

Behavior science can also assist investors with identifying founders that have personality traits that correlate with success. In our discussion with Chris, he shared the Big 5 OCEAN personality traits: Openness, Conscientiousness, Extraversion, Agreeableness, Neuroticism. You can take a short version of the test here in about 10 minutes to see how you stack up!

Strong founders tend to be high on agreeableness, extroversion, and openness, but low on conscientiousness and neuroticism. This seems to make sense because founders need to win people over with their vision, effectively pivot as the market changes, and move forward without freaking out when things don’t go as planned. This is incredibly important because, in early-stage startups, things go wrong every day, if not every hour. 

Here are a few other considerations when evaluating a potential early-stage investment:

• Remember your gut has hardwired biases, so consider what it is telling you in the context of these biases
• People are overconfident… the pitch will lean towards overestimating the good and underestimating the bad
• Reduce your confirmation bias by weighing diligence that confirms and contradicts your initial assumptions equally
• Assess as much of the data as you can before learning about the demographics of the founder and the team to reduce the effects of similarity biases

Our ancestral biases get in the way of our decision-making, by default, most of the time. Angel investors meet hundreds or even thousands of founders every year trying to identify the best 10 or 20 to invest in. One way to solve this (and invest more effectively) would be to somehow learn what these Big 5 personality traits are in founders before learning/seeing their demographics (age, gender, ethnicity, etc). We would love to hear your ideas on how to employ more tactics like this.

Co-authored by:

Paige Soya, Managing Director of K Street Capital

Daniel Young, Investment Manager