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In Startups, Satisficing – businessideaguru

May 15, 2022
in Entrepreneur
Reading Time: 3 mins read
In Startups, Satisficing – businessideaguru
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The amount of money you spend on the information does not have a linear relationship with the amount of useful information you can find. Customers and merchants must make decisions in the context of incomplete information.

 

Getty

Economics isn’t particularly popular amongst company entrepreneurs, and for a good reason: the field of research doesn’t often convert well into usable, useful data. Area, technical, and marketing experience may be more important for a startup project’s success.

However, some economic notions can give you psychological models that can help you think about things more efficiently. One of these is satisficing, which helps you understand the decision-making process of many stakeholders in your project, including yourself.

Classical economists simplify purchasers’ choices to make their lives easier – they believe that buyers are rational (homo economics) and have access to superior information.

Each assumption can be readily questioned.

First, in the real world, people are subject to various cognitive biases (i.e., they don’t appear to be entirely rational) and must make decisions based on incomplete information.

Second, buying information is expensive and yields decreasing returns — the amount of time you spend on information isn’t proportional to the amount of good information you’ll be able to find. As a result, to make any decision, it’s important to do so with incomplete information, and the sooner you can lower your costs of acquiring fresh information, the better.

That is why behavioral economics introduces the concept of satisficing. Rather than maximizing the cost-utility function to make the best consumption decision, people are more likely to take the path of least resistance.

Depending on the startup issues you’re dealing with, satisficing has a few distinct implications for you.

It illustrates, for example, that the “build it and they will come” cliché is simply incorrect and that adhering to it could lead to the failure of your project. Even if the value of your solution is objectively higher, your customers lack adequate information.

In other words, they aren’t aware of your product and its value to them, and they aren’t eager to invest time and money into acquiring that information.

This demonstrates how important it is to approach people and educate them about the utility you provide to the success of your project and how the perceived utility may be far more important than the target utility.

Another good example is the “get everything perfect before you launch” blunder. As an entrepreneur, you, like your customers, lack outstanding information. As a result, you can’t make your product outstanding by definition because you don’t know what an ideal product is, and obtaining this data has diminishing returns.

Instead, it’s better to make your product “ok” and launch it sooner rather than later. Going through this process as quickly and inexpensively as possible will free up more resources to iterate and discover product-market fit without relying on high-quality data. Instead, you’ll rely on empirical observations.

In the abstract, a thorough understanding of the concept of satisficing will enable you to avoid the trap of believing you have perfect information about your project and how it interacts with the rest of the world and will enable you to make decisions in an imperfect-information framework that will help you better manage your risk and assets.

The amount of money you spend on the information does not have a linear relationship with the amount of useful information you can find. Customers and merchants must make decisions in the context of incomplete information.

 

Getty

Economics isn’t particularly popular amongst company entrepreneurs, and for a good reason: the field of research doesn’t often convert well into usable, useful data. Area, technical, and marketing experience may be more important for a startup project’s success.

However, some economic notions can give you psychological models that can help you think about things more efficiently. One of these is satisficing, which helps you understand the decision-making process of many stakeholders in your project, including yourself.

Classical economists simplify purchasers’ choices to make their lives easier – they believe that buyers are rational (homo economics) and have access to superior information.

Each assumption can be readily questioned.

First, in the real world, people are subject to various cognitive biases (i.e., they don’t appear to be entirely rational) and must make decisions based on incomplete information.

Second, buying information is expensive and yields decreasing returns — the amount of time you spend on information isn’t proportional to the amount of good information you’ll be able to find. As a result, to make any decision, it’s important to do so with incomplete information, and the sooner you can lower your costs of acquiring fresh information, the better.

That is why behavioral economics introduces the concept of satisficing. Rather than maximizing the cost-utility function to make the best consumption decision, people are more likely to take the path of least resistance.

Depending on the startup issues you’re dealing with, satisficing has a few distinct implications for you.

It illustrates, for example, that the “build it and they will come” cliché is simply incorrect and that adhering to it could lead to the failure of your project. Even if the value of your solution is objectively higher, your customers lack adequate information.

In other words, they aren’t aware of your product and its value to them, and they aren’t eager to invest time and money into acquiring that information.

This demonstrates how important it is to approach people and educate them about the utility you provide to the success of your project and how the perceived utility may be far more important than the target utility.

Another good example is the “get everything perfect before you launch” blunder. As an entrepreneur, you, like your customers, lack outstanding information. As a result, you can’t make your product outstanding by definition because you don’t know what an ideal product is, and obtaining this data has diminishing returns.

Instead, it’s better to make your product “ok” and launch it sooner rather than later. Going through this process as quickly and inexpensively as possible will free up more resources to iterate and discover product-market fit without relying on high-quality data. Instead, you’ll rely on empirical observations.

In the abstract, a thorough understanding of the concept of satisficing will enable you to avoid the trap of believing you have perfect information about your project and how it interacts with the rest of the world and will enable you to make decisions in an imperfect-information framework that will help you better manage your risk and assets.

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