The 3 Same Demons that Startup Founders and Stock Traders Face

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You would think that startup founders and stock traders have nothing in common, but when it comes to characteristics needed for success, it turns out that they have to overcome many of the same psychological difficulties. I was reading the book Trading for a Living, partly because I am involved in a software project related to it and partly because I have been doing some trading as a hobby myself. A major part of the book is about trader psychology, like how to defeat your inner demons to succeed. I noticed that this stuff really applies to startups as well.

1. Dishonesty and Postponing Losses

Honesty to oneself is important in any field. The book advocates keeping records of all trades and planning ahead. Before doing a trade, one should have a plan when to exit the trade and always put a stop-loss to limit the amount of money that can be lost on the trade. Amateur traders sometimes neglect this and get stuck with their shares when prices decline. Their hope of some magical event turning the price trend around keeps them from selling. For them it is always possible to find some indicator giving false hope. It is human nature to postpone losses.

The record keeping and planning in the startup world is covered by basic customer development, where you write down your business hypotheses and your plan to test them. This includes what the result must be in order for the hypothesis to be valid. Steve Blank, the inventor of the customer development model, also speaks for the importance of writing down the exit criteria (pass/fail) of a test before executing it in his Startup Manual. It is too easy to find some other metric showing positive signs. Founders need to be honest with themselves, otherwise they will hurt themselves just the way traders do when they hang on to their shares to the bitter end.

It is very easy to fall into this trap. For example a simple MVP (Minimum Viable Product) with a landing page may be used to test general interest in a new product. One might set a specific requirement for the signup ratio of new visitors coming to the page. If there are too few signups but instead some social shares with discussions and long visits to the page, the founder can easily find a way how to interpret this as a success even though it is not.

The new observations about how users shared and discussed the page is still valuable insight. It should be used to plan new tests. However, it cannot be used to pass the current test, that had a different requirement. It is as easy for a founder as it is for a trader to find false proof justifying the current strategy. In practice, both are just postponing the losses.

I fell into this trap in my own startup. We did not plan our tests well enough with clear exit criteria and we were not fully honest to ourselves either. We ended up hanging to the same idea too long, hoping for some miracle to happen while implementing more features to better support the wrong idea. The pain we went through is actually quite similar to what a trader feels like when his stock is going down and he keeps buying more in hope of a change to the trend to get even.

2. Repeating Mistakes

Traders should try to look for repetitive success and failure patterns in their trading records. They should write down why they thought the trade was good, what they where feeling, etc. A startup that has been running for a longer time and tried out several different things can probably find similar patterns in all experiments they conducted. Even though all ideas would have failed, it still would be possible to find common mistakes that were repeated or common reasons why stupid things were done.

A startup should be able learn which types of experiments were unnecessarily expensive and could have been tested in a more efficient and cheaper way. I bet many failed startups wasted most of their time on a few very bad ideas/features, just like failed traders usually destroy their accounts with a few really bad trades. If traders can find out what the common denominator is, why couldn’t startups?

3. Irrational Goals

Another very interesting point in the book is that many traders are consciously or unconsciously trying to satisfy irrational goals when they trade. The one and only rational goal a trader should have is to make money. Typical irrational goals a trader has are getting some excitement into their otherwise boring lives or honor from a big win. These irrational goals hurt traders. I think the problem of having irrational goals is even worse for startup founders, who can have quite many of them.

When I think back of the times I had my own startup, I remember how good it felt when Mashable, TheNextWeb and lots of other tech blogs wrote about our first product. In terms of product-market fit, we were not ready for a full launch at all. By doing a big press release, we satisfied an irrational goal of getting acknowledgement for all our hard work. Doing a big launch before product-market fit is often considered bad, because potential pivots and other corrections to positioning, etc. are going to be very expensive. Unfortunately it is very hard to keep oneself from pulling the trigger too early.

Additionally, I remember many times thinking what completely irrelevant people (to the business) are going to think about our product or some feature. What if we spent too long time iterating and experimenting? What would people think of us after 6 months if we only had built something small? To look good in front of other people is an irrational goal. Adding more features is an easy way to satisfy that irrational goal. Allowing this kind of thoughts in your brain is dangerous and may take you one step closer to featurism.

Irrational goals must be satisfied elsewhere. Maybe it should be some hobby or something less important. Actually, to be really honest, I use this blog to satisfy some of my irrational goals.

Photo edited from original creation by L. Whittaker