Thinking About Thinking

When The Majority Is Wrong

Posted in Pop Culture, Venture Capital by larrycheng on November 21, 2011

Despite the fact that often times the majority rules, that doesn’t mean the majority is right.

The most poignant example comes from a premier venture capital firm I once worked for.  One of the opportunities they gave their investment professionals was the opportunity to invest personally and on a discretionary basis in each round of each financing the firm participated in.  You didn’t have to invest, or you could “max out”, or you could do anything in between.  There was a maximum amount you could put into each round based on your level in the firm.

Most interestingly, after each financing round closed, they would publish to the entire investment team how much each person invested for their discretionary investment in that round.  There is no better way to tell how a person feels about an investment than to see the size of their personal check.  It was the most honest moment of the entire investment discussion.  There were certainly cases when everyone in the firm maxed out their personal investment (e.g. the “max out scenario”).  And, there was a similar frequency of cases when nearly everyone didn’t participate except the individual partner sponsoring the deal (e.g. the “zero out” scenario).  These decisions were always made after individuals would talk to each other behind the scenes to discuss how much they were going to put into each investment – they were rarely made in isolation.

What I learned from watching these personal investment decisions made over and over again was somewhat surprising.  A great predictor of failure for an investment was when the max out scenario took place.  If everyone loved a deal and backed up the truck on their personal investment, it was more than likely to not succeed.  In fact, those deals often failed in quick fashion.  The inverse was surprisingly true as well.  More often than not, for those investments where the zero out scenario took place, they often became successes –  sometimes the biggest successes.  At the other firms I have worked at, various forms of this experiment have taken place and this observation holds true through different economic times, different investments, and different firms.

Why?  How can it be that when a group of intelligent, seasoned investment professionals agree –  they are often wrong?  The answer is simple: investment partnerships are the perfect breeding ground for groupthink.  Groupthink according to Wikipedia is: “a psychological phenomenon that occurs within groups of people….  Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative ideas and viewpoints.”  There are important cases in history where groupthink played a material role such as in Pearl Harbor and the Bay of Pigs.

The reason venture partnerships foster groupthink is best articulated by Irving Janis, a pre-eminent researcher on groupthink.  He suggests that certain contextual ingredients make groupthink more likely including:

  1. High Group Cohesiveness
  2. Group Insulation
  3. Lack of Impartial Leadership
  4. Lack of Norms Requiring Methodological Procedures
  5. Homogeneity of Members’ Social Background and Ideology

Venture partnerships are often cohesive, insulated, and homogeneous groups –  a perfect breeding ground for groupthink.

How do you protect against groupthink?  I think you simply ask yourself two questions trying to be as impartial as possible:

  1. Ask yourself – could the dissenting opinion be right?  Listen to and fully understand the point of view of the person expressing a dissenting opinion, especially if that person is the sole voice in the room.  Fully consider their point of view as it may very well be the right one.  Give it weight in your mind.
  2. Ask yourself – could your majority opinion be wrong?  Have you arrived at your opinion without sufficient critical analysis?  Are you basing your position on assumptions that you presume to be true, but that perhaps are not sufficiently tested or researched?  Be humble, don’t think too highly of your own point of view.

Until you’ve understood how your majority opinion could be wrong, you should strongly question whether your opinion is right.  Until you’ve understood how a dissenting opinion could be right, you should strongly question whether it is wrong.  A great and simple test is whether you can argue both the majority and dissenting opinion well – irrespective of which one you hold.

The best venture partnerships understand this dynamic and take it into account in their decision-making.  One firm I used to work at mandated a dissenting partner on all deals.  Another firm always allowed for a single champion to carry a deal through rather than requiring partnership consensus.  While groupthink may ultimately exist within the partnership model, it doesn’t have to be nor should partnerships let it be the deciding factor at the end of the day.

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  1. Phineas Barnes (@phineasb) said, on November 22, 2011 at 9:54 pm

    Really interesting. I have spent a lot of time thinking about how to justify the group decision making in a business that is all about identifying/investing in outliers. Given the distribution of fund returns across the typical VC portfolio, the mistakes you avoid through a group balancing the individual carry 5 or 10 or 20 to 100 x less weight in the overall return math than one big win that you invest in because one person was passionate – and yet the decisions are made in groups at all stages — from seed where very little data exists about the investment to LBOs where there is so much data the challenge is finding signal in the noise.

    also not surprised that when something is loved by all, it is likely to be too close to the current state of the world to generate significant disruption/change/enterprise value and success

    would love to know how you think about moving a group toward outlier thinking in term of process or orientation

  2. Gilles said, on November 23, 2011 at 6:45 am

    Interesting, really.

    In quite a number of occasions (group games), I have tried to bet against the majority to maximize the reward.

    It would go like this: questions were asked, if we ended up after several rounds with several winners the prize was divided among those who made it to the final round.

    Therefore, when the question was very tricky and only a guess could be made at best, I looked at the number of people who raised their hand for an answer and went with the smaller group, the idea being to share the final prize with only a few people instead of sharing it with a large number!…

    (it did not work because at one stage or another the answer was wrong, but I thought it was good food for thought as a strategy to go with the minority in case of absolutely uncertainty).

  3. [...] Cheng is a managing partner with Volition Capital. This column first appeared on his blog, Thinking About Thinking. You can follow Cheng on Twitter [...]

  4. Clint Korver said, on November 25, 2011 at 12:54 pm

    Larry, intriguing post. Venture capital could be considered a poster child for cognitive biases in general (not just groupthink). Extreme uncertainty, few data points, and long feedback loops create a perfect breeding ground for decision traps and poor thinking at an individual level as well. Here are two additional mechanisms for helping. 1.) Diversity among the people working a decision. While a devil’s advocate moves in this direction, real diversity in a decision making body leads to more robust conversations and depth of thinking. 2) a decision making process that can be benchmarked and improved. Many cognitive biases are self-sealing in that the bias forms a protective mental barrier around itself, keeping out dis-confirming information. An effective decision process systematically incorporates all data, allowing for more informed decisions.

    • larrycheng said, on November 28, 2011 at 6:23 pm

      Clint, diversity is particularly helpful if there isn’t an alpha personality in the room. Unfortunately, in our business, there are plenty of alpha personalities around venture partnerships, so sometimes all the good that can come from a diversity of perspectives can be a bit more muted.

  5. Alan Huang said, on November 28, 2011 at 6:07 pm

    Interesting points, Larry. I’ll add another technique that I’ve read about to help break through group-think called the “premortem”, as discussed by Daniel Kahneman in an interview with the McKinsey Quarterly:

    Before a project starts, we should say, “We’re looking in a crystal ball, and this project has failed; it’s a fiasco. Now, everybody, take two minutes and write down all the reasons why you think the project failed.” The logic is that instead of showing people that you are smart because you can come up with a good plan, you show you’re smart by thinking of insightful reasons why this project might go south. If you make it part of your corporate culture, then you create an interesting competition: “I want to come up with some possible problem that other people haven’t even thought of.” The whole dynamic changes from trying to avoid anything that might disrupt harmony to trying to surface potential problems.

    Link: https://www.mckinseyquarterly.com/Strategy/Strategic_Thinking/Strategic_decisions_When_can_you_trust_your_gut_2557

    • larrycheng said, on November 28, 2011 at 6:22 pm

      Alan, I love the name pre-mortem. I might have to use that in a future blog post and explain how we do pre-mortems as it relates to investment decisions. Thanks for the insight.

  6. Swing Sets said, on November 29, 2011 at 2:40 pm

    It would be interesting to analyze the “group think” example that you mentioned a little more closely to see if there were other factors such as peer perception actually influenced the decisions. For example if the position in the firm of the person heading the project influenced the number of people who “maxed out”. In other words if your my boss and your sweet on an investment I am more likely to “max out” on something your passionate about rather than Joe ABC thus my decision is based on peer influence not group think.

  7. [...] When The Majority Is Wrong (larrycheng.com) [...]


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