Entrepreneurship is as much about mindset as it is about innovation and execution. While passion, vision, and perseverance are often celebrated, a less discussed—but equally critical—aspect of entrepreneurial success is self-awareness, particularly regarding behavioural biases in entrepreneurship. These are subconscious tendencies that can cloud judgment and influence decision-making in ways that are not always rational.

Understanding and mitigating behavioural biases in entrepreneurship can mean the difference between thriving and failing in the unpredictable world of business. Below, we explore five common cognitive biases affecting business decisions, along with real-world examples of how these biases can shape entrepreneurial outcomes.

1. Overconfidence bias
2. Loss aversion
3. Sunk cost fallacy
4. Confirmation bias
5. Illusion of control
6. Tips for managing behavioural biases in entrepreneurship
7. Final thoughts

One of the most prevalent behavioural biases in entrepreneurship is overconfidence—the tendency to overestimate one’s skills, knowledge, or chances of success. This bias can lead entrepreneurs to take unnecessary risks or ignore potential red flags.

Entrepreneurs—often visionaries driven by passion—are especially prone to this bias. While confidence is necessary to start and scale a business, overconfidence can lead to unrealistic expectations, underestimation of risks, and inadequate planning.

Key takeaway: Overconfidence can blind entrepreneurs to the value of incremental validation and user feedback. Building humility into the process—via lean startup principles, user testing, and external validation—can curb this bias and create a safer runway for innovation. 

Loss aversion is another common behavioural bias in entrepreneurship. It refers to the psychological tendency to fear losses more than we value equivalent gains. This bias can lead to excessive caution and missed opportunities—especially problematic in entrepreneurship, where calculated risks are essential to growth.

A practical example: Imagine an entrepreneur running a mid-sized printing business. She is presented with a chance to digitize her operations by investing in AI-powered software that could reduce costs by 30% over two years. Despite the long-term benefits, she balks at the $50,000 upfront cost, focusing more on the immediate loss of cash flow than the potential for increased profitability. A competitor who does make the investment quickly gains an edge, offering lower prices and better service. Within two years, the owner’s loss aversion in entrepreneurship prevents strategic evolution and results in reduced market share.

Key takeaway: The fear of short-term loss can paralyze strategic thinking. To mitigate this, entrepreneurs should focus on expected value rather than just worst-case outcomes. Scenario analysis, ROI modeling, and talking to other adopters of similar innovations can help shift perspective from fear to informed foresight.

The sunk cost fallacy is the inclination to continue a project due to already-invested resources, even when future returns are doubtful. Among the most damaging cognitive biases in small business, it often stems from emotional attachment or the fear of failure.

Regularly scheduled project reviews and decision checkpoints can help entrepreneurs stay objective and pivot when necessary.

Confirmation bias is the tendency to seek, interpret, and remember information that confirms our pre-existing beliefs, while dismissing or undervaluing evidence that contradicts them. As a key bias impacting entrepreneurship, it can severely impair learning, especially in dynamic markets where adaptability is critical. This can stifle innovation and lead to poor strategic choices.

A practical example: A small business owner develops a new software program designed to help law offices manage their day-to-day operations, such as scheduling, billing, and document tracking. He’s convinced that small law firms are the perfect customers for this product. After launching, however, feedback from early users in that group is lukewarm. Many complain that the price is too high and that the software doesn’t work well with other tools they already use. Despite this, the owner focuses only on the handful of positive comments and dismisses suggestions from legal industry experts who recommend targeting slightly larger firms instead. Months pass with little growth, and eventually, a competitor enters the market with a version tailored specifically for mid-sized firms—quickly gaining traction and leaving the original product behind.

Key takeaway: Confirmation bias can create echo chambers within leadership teams. To counteract it, entrepreneurs should proactively seek dissenting opinions, conduct blind user research, and set up metrics-based systems for testing assumptions.

Decision-making frameworks like the “red team” approach can also be valuable. In this method, a separate group—often made up of team members or external advisors—is assigned the specific role of challenging the current plan or belief. Their goal is to poke holes in the logic, surface blind spots, and offer alternative perspectives. This kind of structured criticism helps leaders see weaknesses they might otherwise overlook, leading to more balanced and informed decisions.

The illusion of control is the mistaken belief that one can influence outcomes that are largely governed by chance or external forces. This is one of the more subtle yet destructive behavioural biases in entrepreneurship. Entrepreneurs often fall into this trap when they believe that hard work and smart strategy alone can overcome macro-level challenges. For entrepreneurs, this can lead to poor risk management and planning.

Tools such as PESTEL analysis (Political, Economic, Social, Technological, Environmental, and Legal) and regular market scanning can help maintain a grounded perspective.

• Keep a decision journal to reflect on outcomes.
• Seek feedback from mentors or peer networks.
• Incorporate structured frameworks like cost-benefit analysis, SWOT, and pre-mortems.
• Schedule regular project reviews to challenge assumptions.

Understanding behavioural biases in entrepreneurship isn’t just an academic exercise—it’s a practical toolkit for sharper decision-making.

It’s important to recognize that some of these biases, while potentially harmful, can also drive innovation and resilience. Overconfidence may lead to bold ideas. Optimism, even if slightly irrational, can help entrepreneurs persist through setbacks. The key is to balance this drive with critical thinking and informed decision-making.

By recognizing and counteracting these five entrepreneurial decision-making biases—overconfidence, loss aversion, sunk cost fallacy, confirmation bias, and illusion of control—entrepreneurs can make smarter choices, use resources more wisely, and improve their odds of long-term success.

• Heuristics and biases in decision making – This was the first post in the series which shares some behavioural economics research. Specifically, the heurstics and biases that influence our relationship with money. It uses System 1 and System 2 thinking examples from Daniel Kahneman’s New York Times best selling book, Thinking Fast and Slow, to help us be more conscious of the workings of our brain. 

• Mirror, mirror, on the wall, stop telling me I’m wonderful – This post focuses on the impact of overconfidence bias in decision making. It introduces the illusion of knowledge bias and the illusion of control bias to illustrate the difference between confidence and carelessness. It also discusses the better than average effect, the self-serving bias and fundamental attribution error. You’ll learn how to confront some unpalatable truths and get out of any false sense of comfort (if you’re up for the challenge?).

• Why you can’t argue with a vegan – Ballsy title, we know. But if you read the post you’ll (hopefully) understand why. We’ll be discussing confirmation bias. It’s one of those psychological biases that you can see everywhere. We’ll also touch on cognitive dissonance theory. We all struggle with these biases. They’re both humorous and serious. But because of that, it’s useful to know how to avoid confirmation bias when you need to.

• Size does matter… when it comes to framing – This post uses framing effect examples to show how framing bias influences the way we interpret information and make decisions. We discuss glossing, the compromise effect, and how the size of the frame can influence the volatility of your investment portfolio.

• Loss aversion vs risk aversion – Once you understand framing, you’re ready for this post. It introduces an incredibly powerful bias known as loss aversion. It also touches on prospect theory, the disposition effect and impression management.

• Anchors pulling you down? – Anchoring bias is a straightforward behavioural bias that causes us to focus on a certain initial value and then make decisions with reference to it. This posts looks at some examples of this anchoring effect.

• The danger of the default – Default options nudge us to make better decisions. The option of opting out also respects freedom of choice. This post unpacks this notion of libertarian paternalism and the perils of status quo bias.

• Regret, it’s not a nice feeling – Regret influences the decisions we make and pushes us to conform to social norms. Examples of regret avoidance show us how this makes complete sense yet no sense at all.

• When the past influences the future – The Concorde effect is a famous example of sunk cost investment. Too often we invest time, money and energy into something we should’ve just abandoned. This post looks at some examples of how sunk cost fallacy affects our human decision processes.

• What’s mine is more valuable – In this post, you’ll learn why you place extra value on things you own. The endowment effect has implications for our investment portfolio, bonuses and consumer behaviour.

• How to improve self-control – Self-control is an essential life skill. It’s what separates humans from the rest of the animal kingdom. Learn how to improve self-control to achieve your long-term goals.

• Procrastination is the enemy of success – We know procrastination is the enemy of success. But while it looks like laziness, it’s often just mental exhaustion at play. Learn how to overcome procrastination.

• The problem with wanting it now – When you delay instant gratification, you will experience long-term satisfaction. It’s the hyperbolic vs exponential discounting debate. Don’t let present bias win!

• The power of first impressions – The order of information influences your decisions. First impressions matter! It’s all got to do with primacy and recency effects.

• We prefer wrong information to no information – Availability bias and survivorship bias influence our decision-making. We make decisions based on the information available to us.

• Learn to deal with uncertainty – Risk and uncertainty will always surround us. Gambler’s Fallacy, the hot-hand effect, the law of small numbers & ambiguity aversion are just some of the biases that arise because of it.

• Stop stereotyping – Representativeness heuristic refers to the fact that we stereotype. It’s a mental shortcut. But beware of making unfounded comparisons.

• Mental accounting – Money is money! Or is it? Mental accounting says we place different values on different money which leads to irrational decision making.

• Money Illusion– Money illusion is a sneaky bias. It causes us to focus on the amount of money in our hands, rather than it’s purchasing power.

• Hone bias– We invest close to home and in what we know. But this lack of diversification results in missed opportunities. Say hello to ‘home bias’.