Overcoming Bias When Investigating A Potential Target

Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.

Most of us don’t consider ourselves to be biased in any way. We prefer to believe that our decisions – including our investment decisions, particularly – are based on sound reasoning which takes into consideration all relevant variables. However, research has shown that, while we might not think we’re biased, most of us (if not all of us) are in some respect or other.

Biologically, of course, this makes perfect sense. After all, we’re more likely to be biased toward both ourselves and our progeny in order to pass on our genes. There’s an instinctive, evolutionary bias. We also have built in biases which help us to make decisions more quickly. Imagine going to the store and staring at the cracker selection. You’ll likely have at least 10-20 available cracker options. Without some bias in the system, it would simply take too long to make a decision. Should that process be repeated for every desired product, grocery shopping would be rendered a day-long event. Thankfully, we each have our own preferences and our built-in biases which help to narrow the field as a matter of pure efficiency.

Investing, however, isn’t nearly equivalent to grocery shopping. We can’t always rely on our past history to narrow the field. Our emotions may also generate biases that could serve to cull companies which we should actually be considering.

These instinctive biases may not be easy to recognize while investing, although it certainly behooves investors to identify and manage their biases in order to maintain focus on their long-term goals. Remaining objective during a pitch and throughout the due diligence process can help us to render a more rational decision and thereby more likely ensure future benefits.

The Bias Blindspot

The biases that we all hold are generally subconscious. While we attribute the actions or choices of others to their unconscious biases, we too infrequently identify the biases in our decision-making or actions. We have a blindspot to our own faults, which tends to lend an extra (but unknown) degree of peril to the experience of investing or starting a business.

The best means of combatting this sort of bias blindspot is through increasing one’s knowledge of the dilemma.

Understanding the different types of biases and how they may each affect us can help us to better identify those circumstances when we’re acting under the influence of a bias.

Types of Subconscious Biases

You may be surprised by some of the following biases (after all, they’re subconscious biases). In fact, we don’t tend to regard some of them as biases, however, they’ve been identified as such by both psychologists and economists. Note, the following list of biases is not complete. Rather, it’s a collection of some common biases which could affect angel investors.

Halo Effect

The halo effect may sound innocent – angelic, even – however, it could presage disastrous results if not identified and adequately warded against.

This bias occurs when we consider one attribute that we know about a person and, consequently, infer other unrelated attributes to that person. For example, we may presume that a person wearing a suit and tie is more professional, makes more money, and is more highly-educated than an individual wearing a button-down shirt and khakis. Similarly, an affable entrepreneur presenting their pitch may appear to be more knowledgeable or successful than they are in reality, leading us to make investments based on assumptions instead of facts.

Optimism/Overconfidence Bias

When considering our ability to make good judgements on potential investments (or otherwise), many of us view our accomplishments through rose-tinted glasses. We consider ourselves to be making better judgements and investments more frequently or with greater accuracy than we do in actuality. This is known as the optimism or overconfidence bias. It’s the same type of bias that affects most of us when we consider our skills in a certain area.

For example, most drivers (around 80%) believe that they’re “above-average” behind the wheel. Naturally, that’s not how averages work. Many of those individuals must (!) have an over-inflated conception of their own skills. With respect to investing, this sort of mis-assessment could easily lead to an investor accepting greater risk than necessary or trusting far too much in their skills and/or knowledge. They may also ignore risk factors or fail to perform adequate due diligence. Being humble isn’t solely a virtue – it can be a money-saver!

Confirmation Bias

As humans, we have a tendency to form opinions prior to having all necessary evidence at hand. Only then do we seek information to corroborate our opinion. We all like to be right and, unfortunately, that particular fault tends to result in a level of confirmation bias of which we must – as angel investors – actively (and constantly) remain aware.

Anchoring Bias

The first bit of information we hear tends to stick in our brains, regardless of what may follow it. Educators know this tendency as the “law of primacy.” When we accord that first data more prominence than other factors, we’re doing ourselves a disservice because we’re making a decision based on incomplete information.

Framing Bias

The truth is that presentation matters. The way that information is presented to us can directly impact our reaction to it. When we frame something positively, people are more likely to view it favorably. For example, you could say that an endeavor has a 70% likelihood of success or that it has a 30% likelihood of failure. If the former is done, then success is viewed as more likely. When the latter is stated, then failure seems more likely despite the fact of the percentages being unchanged.

Familiarity Bias

As investors, we naturally tend to be most comfortable with our own industries and areas of expertise, leading us to invest in those sectors. This is partly due to the familiarity bias. It’s easier to determine whether an investment in a particular company within our own industry might be successful, than to learn about an entirely new industry. At the same time, sticking with what’s most familiar can serve to limit our options.


Just because the rest of one’s angel group likes a particular target, doesn’t mean that you should write a check or that you’re being unwise by skipping that investment opportunity. Too frequently, we doubt ourselves in group situations when, instead, we should be speaking out.

How to Overcome These Biases When Investing

Once you’ve learned about some of the different subconscious biases to which we as humans can fall prey, you can begin to understand how best to combat them. These seven ways of breaking down some of your biases should help when trying to find your next investment target – make them part of a routine to help you monitor and address any biases that you encounter:

Take your Time

You know that gut feeling you get during a pitch? That intuition is generally based on a bias. While this bias can certainly save you time – especially when it’s been fine-tuned after hundreds of other pitches – it can also unnecessarily cull some of the proverbial wheat with the chaff.

Investigate that gut feeling and think carefully prior to making a decision. Determine, as best you can, the actual basis in fact for your gut feeling.

Understand the Risk

It’s easy to be overly optimistic about the opportunity for a positive return. It’s important to remember that most angel deals end in either a net zero exit or a loss. Frequently, diversification helps to keep portfolios on the positive side of the ledger. Every investment represents a risk and each company carries different risks. Take the time to investigate just how things are being framed and whether your expectations are too high.

Focus on Data

Stories are great, aren’t they? The way they draw on our empathy and get us involved in the narrative? There’s no doubt that companies will tell you a story when they pitch you. In fact, the telling of customer stories is strongly recommended during a pitch. It pays to remember that, while these recollections may pull at our heartstrings and make it easier for us to see the value in a company, they can also be the basis of bias. Rather than focusing on narratives, which are frequently anecdotal (and which are handpicked in order to sell you something), focus on data. Ask for numbers and know which numbers you need to see prior to considering an investment. For example, you may want to know the size of the target market, the cost of a product’s production, the product’s suggested retail price, the estimated sales numbers, etc.

Have an Investment Strategy in Place

Having a strategy in place that lists your investment requirements can help to reduce the likelihood of your making an uninformed or biased investment.

Keep Your Goals in Mind

Sometimes, bias can render us short-sighted. Under its influence, we may concern ourselves more with the present and the excitement of a particular startup than with the future. As an investor, you likely have specific goals that you want to achieve with your investments. For many angels, such goals may include making socially-conscious investments. When performing due diligence or listening to a pitch, make sure that both the potential investment and the information you’re being provided align with your goals.

Question Your Assumptions

None of us are completely clean slates. We each come to the table with our own histories, ideas, and opinions. When listening to a pitch, networking with entrepreneurs, or performing due diligence, it’s important that we question how the unique lens through which we’re viewing is coloring reality. While our experiences provide us with plenty of useful information that we use to make better decisions, at the same time, they can blind us to particular opportunities.

Seek Opposing Opinions

Slowing down decision-making and investigating opposing viewpoints (as well as speaking with others who sincerely-hold opposing viewpoints) can help to provide us with more information and result in our making better choices. If someone whom you respect or admire holds a different view on a particular investment, it’s wise to have a conversation with them to learn how they formed their opinion. This approach tends to be far more effective than simply attempting to play devil’s advocate with your perceived set of facts.


Many of the biases we harbor help us to function effectively, however, they can also serve to hinder us. Keep these unconscious biases in mind when performing your angel investing legwork so that you’re better able to limit their influence as you’re researching and identifying potential investment targets.

About the Author

Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).

Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.

Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.