How To Improve Decision Making as a VC or Founder with NYT Bestselling Author Dan Gardner

By Collin West with Fernanda Orona

With giant IPOs and the crypto boom, it’s easy to forget that many of the biggest returning investments go against the consensus. For example, we were fortunate enough to invest in Zoom and, at the time, there were plenty of reasons to not do the deal.

Mainstream video conference usage had been “5 years away” for what felt like 30 years. There was a graveyard of competitors and Google was giving Hangouts away for free. Outside looking in, the company looked like it had a ton of market risk.

So, how do investors get over that sense of fear, put their bias aside, and understand the company and this opportunity from first principles to get to a better decision?

In this Q&A, we talk to Dan Gardner, author of Superforecasting, Future Babble, and Risk.

What is your definition of fear?

When we talk about fear in this conversation, we are discussing the concern for bad outcomes and not the fear for bodily harm. Even people who think they are being logical and rational succumb to errors, like availability bias, recency bias, and status quo bias.

Whatever the recent trend is, people naturally think that will continue - this is a trait that has kept us alive for thousands of years. This is also true of retail investors and seasoned venture capitalists. We swing from panic and worry to indifference quickly.

This is a fundamental human dynamic, so what do you do about it?

First, you must understand the dynamic and what generates these responses. Understand the psychology. Then, this is the hard part, you have to accept that this applies to you too.

My favorite error in thinking is called 'bias bias' – other people are biased, but not me. This is fundamentally untrue. We all have the same errors in thinking.

What separates superforecasters from average people?

The best people think about ‘how’ they think and engage in a lot of meta-cognition - thinking about thinking and the errors in their thinking. They are always tweaking and improving the process.

“To err is human; to forgive, divine.” –Alexander Pope

The process of forecasting accurately is exhausting and most people aren’t prepared to do that. To do it well requires psychological awareness of human flaws, biases, and ruthless honesty about the particular biases that you fall into often. Many great decision-makers go through such a high level of self-examination that in a pitch meeting they will feel like they are almost disembodied like they have their own 3rd person in the room observing and analyzing the conversation.

Once you get good at that self-examination, you then have to engage in the mentally exhausting process of continually adjusting your forecasts so you can be more accurate over time. This requires changing who you are and how you think, not assuming you have the right answer from the beginning.

What can we learn from our biology?

First thing is that 100,000 years of evolution does not help venture capitalists because their job requires one-off decisions that do not cause actual pain or bodily harm. It’s a completely different way of thinking about a problem.

Looking at human beings as a species, you will recognize that our evolution is very important. By comparison, in evolutionary terms, it is like science and statistics were invented 5 minutes ago. The earliest studies of probability started in the 1500s. The word scientist was coined in 1832. The formal education system became widespread only in the 1900s.

Our brain and body are designed to feel fear to reduce harm. But as investors, we have these feelings – anxiety, stress, fear – in a completely new environment. We have to remind ourselves what the risks are, and if you have a portfolio, you actually want to pursue some risk, something your mind and body are screaming for you to avoid. In this case, rational investing can feel very irrational.

For example, scientists often wonder why the public doesn’t understand their thinking. Well, to become a scientist, you have to spend 20-30 years in a specific scientific culture that is antithetical to how normal people think and act. You need to understand that most humans don’t think in the same way as a scientist in a lab.

What is the right way to communicate learnings and predictions?

When communicating, always use ordinary and plain language. If you really understand the subject, you will be able to achieve this goal. If not, you’ll struggle. The struggle is good because it will reveal the lack of clarity in your thinking.

“Everything is vague to a degree you do not realize till you have tried to make it precise, and everything precise is so remote from everything that we normally think that you cannot for a moment suppose that is what we really mean when we say what we think.” –Bertrand Russel

This might seem incredibly obvious but if something has an 80% chance of happening, that does not mean it is guaranteed to happen. People conflate a high probability – 80%, 90%, 95% – with certainty, and they are not the same thing. An 80% probability that something will happen means, obviously, that there is a 20% chance that it will not. That is not a small probability; that’s 1 in 5.

When there are millions of dollars at stake, a change of 5% in certainty can have a dramatic outcome. Make sure your team, your partners, and your stakeholders understand what you mean when you are communicating about a probability or about the future.

How do superforecasters assess situations?

Superforecasters have high intellectual curiosity. Also, the world is a very complex and nuanced place. Any time we communicate something to another person, we almost always oversimplify it for expediency. A great decision-maker always seeks more data points and asks more questions. You will notice that many have spent 20, 30, or even 40 years in the same industry, perfecting the same thought process and worldview.

We also have to talk about the inside view vs. the outside view. The outside view is understanding the system, the economy, the structure, the big picture. Whatever we are analyzing is one instance in a larger class.

Then you focus on the inside view, this is what psychology wants us to focus on. The person, the interactions, the thinking, the specific circumstance - many things that can bias our decisions. Our minds want us to use inside thinking, but you will notice that the best thinkers start outside first.

Another key technique Superforecasters use is Fermi Estimation. When we make a decision, a lot of the time, the decision seems simple but relies on our unconscious biases. With Fermi Estimation, we break down a decision into many smaller fundamentals that are easier to estimate. If you increase the accuracy of each smaller estimation by even a little bit, this will add up to a much better overall decision.

What other decision tips and tricks do you have?

Confirmation bias is a big issue for decision-makers. This happens all the time: An investor falls in love with a deal, and all of their diligence is to confirm why they should make this investment. However, your goal as a decision-maker should be to stress test ideas and look for disconfirming evidence, rather than confirming. But, searching for reasons that prove your own decision wrong is incredibly unnatural.

Superforcasters are very good at proving themselves wrong and are proud of this - they wear it as a badge of honor. This gives them a self-identity that creates space for them to change their mind regularly.

What impact does time horizon have on forecasting?

The best decision-makers focus on the next unit of work. For an athlete, that would be the next game or match. They are not focused on winning the league or the championship. They know they need to focus all their effort and attention on the next game.

Naturally, business people need to focus on a different time horizon. They need to focus on quarters and years. Regardless, the same principle holds true. The further out you forecast, the less certainty there will be.

Regardless of who you are, you need to have humility when forecasting and relentlessly self-examine your decision-making.