Despite all the cool jobs available in the universe. A lot of folks don’t want anything to do with dragging their body to an office full of people preoccupied in a bloody battle to the top of the corporate ladder while pretending to care about others. They want to start a business. Create their own version of how someone should make a living. And, potentially, obtain this mystical state of work-life balance.
Starting a business, however, doesn’t mean that you’ll have a successful business.
It’s like deciding that you want to get fit. A gym membership doesn’t guarantee that you’ll lose weight. It’s a journey. And this journey always involves encountering a series of “amazing” challenges.
In the field of business, some of these obstacles are: self-doubt, failure to create a likable product, overconfidence that doesn’t lead to any results, lack of patience and motivation when things are not working out the way you want them to be. Eventually, there is a high chance that you will return to the place you left – in a cubicle. Faking your desire to work for someone else.
Fortunately, we can prepare ourselves.
We can use some of the finest mental models available in the online verse to battle-test our business concept and prevent a shameful return to the corporate office or losing tons of time and money working on a flawed idea.
Here are 7 mental models in business that will help you start, grow, and stay in business:
7 Mental Models in Business:
1. Survivorship Bias
These days, everyone wants to start a business. Quit his 9 to 5 job and enjoy the life of the entrepreneur. A luxurious existence where you talk to a camera with the underlying goal to persuade others that they should follow their dreams while paying you, so you can follow yours.
Yes, I’m talking about all the YouTubers who sell a way of living. The modern TV personalities who make it sound like starting a business guarantee making it in business.
But even if you want to do something beyond talking about how cool your life is – e.g., educate people, sell goods, build a SaaS application. There is still plenty of evidence that you can make it regardless of your industry. That your business will succeed. Somehow emerge beneath the flood of products and reach a critical point of sales that will make your efforts worth it.
I think that survivorship bias is one of the most important mental models to understand if you’re thinking about starting a business.
So, what is survivorship bias?
In short, this thinking concept aims to explain that we, solely looking at the successful businesses – the ones that survived – fail to see all those who have failed.
The reason we are only seeing the survivors, it’s because everyone is talking about them – no one mentions the people who went bankrupt. However, the number of businesses that have collapsed is much higher than those we read about in major publications.
Statically speaking, your business will likely fail in the first two years and will probably never pass the 15 years mark. Only 25% of new businesses make it to 15 years or more.1
We never see these numbers. We are introduced to only the 25%. The ones who do make it.
This twisted reality makes you believe that everyone starting a business is successful while in reality, the situation is quite different.
Since magazines, websites, books, people on YouTube focus on talking about successful people, we convince ourselves that we will succeed, too.
Think about it, when someone mentions podcasting and how you can become rich by creating radio shows, this person always talks about Joe Rogan – the person earning 1 million per episode. But have you ever thought about why no one is mentioning someone else?2
That’s right because there aren’t many podcasters that make a living podcasting. We are only introduced to the ones who have survived, which prevents us to see the pile of “corpses” that failed along the way.
The survivorship bias invites rationality when considering starting a business. You see the ones who made it. But you also explore the ones who didn’t. This allows you to see the ugly truth about creating your own company – that not everyone is successful. Additionally, you can learn from the ones who went bankrupt. Recognize the mistakes they did so you can avoid them.
2. Self-Serving Bias
The self-serving bias explains that we have a tendency to attribute our skills and knowledge to positive outcomes. Yet, when there are negative outcomes, we blame external situations.
For instance, if you just launched a product and you’re gaining good returns. Your mind will make you think that you’re a genius marketer. On the flip side, if your product launch was not that successful, you’re likely to blame the market or the people for not understanding your ingenious offering.
Self-serving bias is enhanced by our desire to maintain a good self-image.3 The mind is protective and wants to ensure that we don’t fall into a negative spiral of thoughts. Therefore, when good things happen to us, we praise ourselves. However, when bad things happen, we never consider that we are to blame. We point the finger at someone/something else.
This mental model is important to understand in business.
You need to look at things objectively to make proper decisions. If things are going OK, don’t pat yourself on the back. Think about what really worked and why – probably you got lucky, who knows. If things are not going well, it’s surely your fault to some degree at least. Re-think your strategy and see what you can correct while keeping a positive spirit of the mind.
3. Commitment and Consistency Bias
As you are aware, we are creatures of habit. We don’t particularly like changes in our behavior. That’s why we keep our bad habits even when we know that they are slowly destroying us.
The commitment and consistency bias explains exactly this repetitive behavior. The brain is reluctant to change and tends to act according to our previous commitments.
In a way, this can be a good thing when we have our own company. Usually, if you just keep doing what you’re doing, you will be OK. However, that’s not always the case.
If you don’t see any positive results from your efforts, it’s probably a good idea to reconsider your product, your market, your messaging.
The world is constantly evolving. You can’t expect to grow your revenue if you keep doing the same things.
The commitment and consistency bias teaches us that we have a tendency to be consistent in our behavior. This, helps us spot what type of consistent behavior is good and what is bad – and needs changing.
4. Hyperbolic Discounting
Hyperbolic discounting is a major component of behavioral economics.
Plainly, hyperbolic discounting refers to our tendency to adore and seek to get rewards that arrive sooner rather than later. That’s the main reason we buy things that give us immediate pleasure (luxury clothes, expensive gadgets) instead of invest in things (stocks, ETFs, etc.) that can lead to more money in the future.
Or in other words, we don’t want to delay our gratification. We want results now.
In the business field, failure to consider this thinking concept can lead to creating a flawed business model.
If you focus on immediate gains, you won’t create a strong foundation for your business. You might use growth tactics that can eventually hurt you. You might sell your product at a largely discounted price that will undermine the way people see your offering and also lead to a negative balance sheet.
Obviously, starting a business is a long-term commitment. It takes time. So, the way you use this time is crucial.
Primarily, we need to create a solid foundation.
Entrepreneurs talk about this all the time online: Start by creating an audience. Usually, this involves freely sharing resources for months – even years. Then, after you have a stadium of people who like what you talk about, you can create a product based on the needs of your fans.
Even if you already have something to sell. Hyperbolic discounting will try to convince you to discount your product to get more sales now. But how is this going to help in the long run? The answer is that it won’t help a tiny bit. You will teach people that your product is always on sale and they will expect a lower price.
Instead, you can take the time to add more value and eventually increase the price. The gratification is delayed, but the gains are way bigger.
5. Comparative Advantage
Developed by the economist David Ricardo, this mental model explains that we need to focus our efforts on producing goods that have both the greatest opportunities and the lowest cost for us.
Let me give you an example to make it a bit clearer.
Theoretically, every person can clean his house. It doesn’t require special skills to turn on a vacuum cleaner. However, millionaires, CEOs, rich people in general, don’t simply hire people to clean and take care of their big mansions because they don’t want to do it. They don’t clean because the hours spent on cleaning can be used to earn them a lot more money than what they spend for hiring someone else to do it for them.
For instance, if the hourly rate of a business owner is $700. It’s better to pay $20 per hour to a person to take care of his lawn.
In the above example, the opportunity cost for the businessman is $700 while in contrast is $20 for the hired person. Even if the owner can do the cleaning in less time because he’s younger – and knows his house better. The hired person has a comparative advantage because he has a lower opportunity cost.
Both parties gain in this exchange. The owner can do his job while also giving a job to someone else.
How does this translate to your business?
Simply put, you should focus your efforts on the tasks that have the biggest opportunity cost and outsource everything else – or automate it.
Let me give you a personal example. As a site owner, writer, my time is best spent if I produce content. The more content I produce, the more my revenue will increase. To cut costs, I can create a system that will take care of my members instead of paying $25 per month to Memberful (I use them for managing the members). Yet, $25 per month is nothing compared to the time I need to spend creating a system and maintaining it.
In this example, and taking into consideration the comparative advantage mental model, I should keep producing articles and keep paying Memberful. That’s how I gain the most out of my time.
6. Forcing Functions
Forcing functions or behavior-shaping constraints – also often called poka-yoke – are design decisions that force the user to do something in order to prevent an error.
For example, think about how a microwave is set to work. You can’t turn it on if the door is open. The product is created to work only when the door is closed. This forces the user to close it.
Similarly, you can use forcing functions to force yourself to do the needed work in order to succeed at your business.
In a way, you are creating a set of rules for yourself that keep you on track.
Here are a couple of examples:
- Scheduling a launch date for your product will force you to ship on time.
- Participating in an online community will force you to stay committed.4
- Investing a significant amount of money will force you to keep working on this project because of another bias – sunk cost (below).
Simply put, think about what you can do to prevent disaster.
Sit down, and consider what you can do to prevent your business from failing. What type of obstacles you might encounter and how do you plan to fight them – consistently?
This mistake-proofing will allow you to test your idea in your head before doing it in real life and potentially waste time and money. Also, prevent yourself from quitting by creating rules that will help you handle the challenges you will face.
7. Sunk Cost Fallacy
“I already invested so much time and money into this project, I can’t quit!”
The above statement explains the sunk cost fallacy in short. Or in other words, we tend to stick to our plans, relationships, businesses even though the current cost outweighs the benefits.
Probably the most dangerous mental model for business owners. We keep pouring money into what often is a sinking ship.
There is a moment in our product lifecycle where we need to be very careful with our future actions. We need to adequately consider whether we need to keep working on our current project or we need to completely revamp our offering or even close shop.
Not only that the sunk cost can keep you engaged in bad personal relationships, but it can also anchor you to something you don’t like or something that is not giving you enough returns.
Being aware of this error in the way we think will give you a fresh perspective and a way to move forward.
You don’t have to keep doing something simply because you’ve been doing it for X number of years. Get unstuck by objectively looking at the situation. Either alter what you’re currently doing or quit and start doing something else.
Some Closing Thoughts
Why is it so hard to create a business that can bring recurring revenue? Enough money so you can keep operating?
Mainly, because we don’t think about how we can keep making money.
Focusing on short-term success won’t do you any good. You might feel like you’re winning. But if you start a shop tailored around a trend, you’ll most likely have to move to a new domain after the hype around “the coolest thing now” – whatever it might be – ceases to exist.
I specifically chose the mental models above to help you think deeply. Not only about the current condition of your business. But also about your possible future condition.
The above frameworks will help you alter your strategy to ensure that your business is not only thriving today. But also keeps thriving tomorrow – and the day after, and the year after.
Lastly, I wanted to say this: revisit these mental models. It’s important to constantly remind ourselves of the default way we think. Meaning that we should often go against our nature to produce good results.
For more on mental models, consider the following:
- Mental Models For Problem-Solving
- Mental Models in Psychology
- Mental Models for Learning
- Mental Models for Decision-Making
- Mental Models In Systems Thinking
- Best Books on Mental Models
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- These stats are based on this research done by Investopedia.com
- Reportedly, Joe Rogan earned $100 million from Spotify. However, if you search for other successful podcasters, you can’t find any.
- According to this study, keeping a positive self-image is crucial to your mental well-being.
- In this article I recently wrote – about the the lack of feedback – I argue that the main reason we quit it’s because we don’t receive enough positive comments from other people. That’s why it’s important to surrond yourself with supporting group of folks.