Owners' Thinking Errors: Confirmation Bias, Overconfidence, Sunk Costs

Why are entrepreneurs particularly prone to thinking errors?

An owner invests in a new machine because he is convinced the orders will come. He prefers to listen to the customers who confirm his assessment. When the orders fail to materialize, he puts more money into advertising because so much has already been invested. Each of these steps feels reasonable in the moment. Together they form a familiar pattern.

A cognitive bias is a systematic deviation of judgment from what the available information suggests. Systematic means it does not occur randomly but in the same direction for many people in similar situations. The guiding question of this analysis is: Which thinking errors most endanger entrepreneurs' decisions, and what really helps against them?

To answer it, I first introduce a thinking model that explains where biases come from. Then I describe three thinking errors that are particularly consequential for owners and what studies show about them. I weigh two views on whether these errors only do harm and end with remedies that work in a business.

The thinking model: fast and slow thinking

The psychologist Daniel Kahneman, who received the Nobel Prize in Economics in 2002, popularized a model in his book "Thinking, Fast and Slow" (2011) that distinguishes two kinds of thinking. System 1 works fast, automatically, and effortlessly. It recognizes faces, reads moods, and delivers a judgment in seconds. System 2 works slowly, consciously, and with effort. It calculates, checks, and weighs.

In daily life System 1 leads, and that is usually a good thing. Without it nobody could drive a car or hold a sales conversation. Thinking errors arise when System 1 takes a shortcut that does not fit the specific situation and System 2 does not intervene because it is tired, distracted, or convinced. An everyday analogy: System 1 is like the autopilot on a familiar route. It drives safely as long as the road is the same as always. At a construction site it notices too late if nobody is paying attention.

The model matters for entrepreneurs because their situation favors System 1. They decide often, under time pressure, and with incomplete information. And unlike in a corporation, there is often nobody who reviews their decision before it takes effect. A related bias, the planning fallacy, is described in the article planning projects in small teams: people underestimate how long an undertaking will take, even though similar undertakings took longer in the past (Kahneman and Tversky 1979).

Thinking errors are not a sign of a lack of intelligence. They are the price we pay for being able to decide quickly.

Three thinking errors that hit owners particularly hard

Research describes dozens of biases. For owners, three are particularly consequential because they affect large decisions that are hard to reverse: investments, growth, and holding on to ventures.

Confirmation bias

Confirmation bias describes the tendency to look for information that confirms one's own assumption and to overlook or discount contradicting information. It is dangerous for owners because their environment often reinforces it. Employees are reluctant to contradict the boss, satisfied customers speak up more often than dissatisfied ones, and whoever has an idea prefers to talk to people who like it.

Overconfidence

Cooper, Woo, and Dunkelberg (1988) surveyed 2,994 entrepreneurs who had just taken over or founded a business. Although the statistics on the survival of young companies were sobering, 81 percent saw their own chance of success at seven out of ten or better, and 33 percent at ten out of ten. They rated the chances of comparable businesses significantly lower, but still favorably. Remarkably, poorly prepared founders were just as optimistic as well-prepared ones. Research calls this overplacement: believing oneself to be better than comparable others.

Sunk costs

Sunk costs are expenses that have already been incurred and cannot be recovered. For a sensible decision about the future they are irrelevant, because they are gone in any case. Nevertheless, it is hard to give up a venture into which a lot of money and work has already flowed. Picone, Di Paola, and Dagnino (2025) describe how overconfident founders tend to increase their investments in the same direction when performance is weak. In their model, the combination of two thinking errors, overconfidence and sunk costs, frequently leads to bankruptcy.

When the remedy reinforces the error

An obvious remedy for overconfidence is the outside view: you compare your own expectation with the results of similar ventures. The article the decision journal recommends it as a fixed part of every major decision. A recent study shows that this method has an important condition.

Blaseg and Schwienbacher (2024) analyzed the planning of 971 aspiring entrepreneurs who used a freely available calculation tool for crowdfunding campaigns between 2016 and 2017. The tool offered to display the historical success rate of comparable campaigns, based on more than 665,000 earlier campaigns. On average, the founders expected a probability of success of 62.5 percent, well above the reference values. But those who looked at the reference values afterward corrected their expectation not downward but upward.

The authors explain this with social comparison: whoever learns that most others fail does not conclude that they themselves are at risk, but that they are better than the others. Experienced and better-educated founders also looked at the reference values less often in the first place. The study concerns crowdfunding, which limits how far it can be generalized, as the authors themselves acknowledge.

Does this contradict the decision journal? Not on closer inspection. In the journal, the expectation is written down with a probability before the decision and later compared with the outcome. Only this feedback improves calibration over time, as the article shows using a multi-year forecasting tournament. A reference value that one looks at only once and then interprets as proof of one's own superiority is the opposite of that. The outside view works when it enters the calculation and is checked later, not when it is merely read.

Two views: harmful errors or useful shortcuts?

The first view treats thinking errors as a malfunction to be eliminated. They lead to bad investments, to projects that run too long, and to growth that exceeds one's strength. Whoever wants to improve their decisions must know these errors and catch them deliberately. The findings of Cooper and colleagues and of Picone and colleagues support this view.

The second view emphasizes that shortcuts in thinking are often useful under uncertainty. Whoever calculates every decision down to the last detail decides too late. And without a certain degree of optimism, hardly anyone would start a business. Cooper, Woo, and Dunkelberg (1988) themselves suggest that the initial euphoria is natural and makes the founders' high personal commitment possible in the first place. Whether it leads to poor preparation, they say, cannot be judged from their data.

My assessment: both views are right, but for different decisions. For small, reversible decisions, quick judgments are usually good enough, and an elaborate procedure costs more than it brings. For large decisions that are hard to reverse, it pays to switch on System 2 deliberately. The article deciding under uncertainty describes this distinction in detail. Optimism helps when starting; it is dangerous when carrying on.

Remedies that work in a business

Knowing about thinking errors hardly protects against them. Even experts who know biases well are subject to them. More effective are procedures that structure the decision before System 1 makes it. The following five are suitable for major decisions in small businesses.

1. Against confirmation bias: the counter-question

   Before you decide, write down what information would change your mind and look for it deliberately. Ask at least one customer or partner from whom you expect disagreement.

2. Against overconfidence: the justified gap

   Take a reference value as the starting point, such as the usual success rate or duration of similar ventures. You must justify in writing every deviation in your favor.

3. Against sunk costs: the question of today

   For every ongoing project, ask: would I start it today if nothing had been invested yet? If not, what has already been spent is no reason to continue.

4. Set stopping criteria in advance

   Before starting, decide at what result by what date you will stop a venture. In hindsight there is always a reason to wait a little longer.

5. Plan for a dissenting voice

   Cooper and colleagues recommend that founders build relationships with outsiders who can assess problems objectively and with detachment. This can be an advisory board, as described in advisory boards for mid-sized businesses, a mentor, or a colleague from another industry.

• For every decision above 10 percent of annual profit there is a written expectation with a probability.
• I have written down what would change my mind.
• For ongoing projects there is a stopping criterion with a date.
• At least one person who does not report to me has seen the decision beforehand.
• After the outcome, I compare expectation and result without looking for someone to blame.

The last point closes the loop. How a debrief that learns from bad decisions without looking for culprits works is described in learning from bad decisions. Why a few key figures give gut feeling something to hold on to is shown in data-driven decisions.

Conclusion: which thinking errors endanger entrepreneurs, and what helps?

The question was
thinking errors most endanger entrepreneurs' decisions and what really helps against them. Three biases are particularly consequential: confirmation bias, which screens out contradicting information; overconfidence, which sets one's own chances too high; and sunk costs, which make stopping harder. Together they can turn a good idea into an expensive bad decision.

What helps against them is less knowledge than procedure. A reference value that one merely looks at can even reinforce overconfidence. Effective are written expectations that are checked later, stopping criteria set in advance, the question of whether you would start again today, and a dissenting voice from outside. For small, reversible decisions, the quick judgment usually remains right.

Thinking errors cannot be switched off. But you can block their path by not leaving important decisions to the moment when they feel most right.