Cognitive repairs in decision-making by venture capitalists

Abstract

This paper examines cognitive repairs as they apply to the decision-making process used by venture capitalists, asking the question of “how could, or how do, cognitive repairs play a role in the decision-making process used by venture capitalists when evaluating a proposal for a new investment?” It begins by reviewing the well-documented concept of human decision-making biases and errors, and then shifts to an overview of the decision-making processes used by venture capitalists when evaluating a proposal for investment in a new venture. It then looks specifically at previous literature that identifies decision-making biases that venture capitalists fall prey to, and follows with reviewing the literature on cognitive repairs: organizational strategies that are used to compensate for or correct decision-making biases. Senior members of the venture capital industry were interviewed to empirically investigate this question, and it was found that while some strategies were in place to reduce human decision-making error, there was both room for and suggested evidence of a greater number of such errors. This leads to the suggestion that the increased use of cognitive repairs by venture capitalists could be beneficial, though this initial research is only of an exploratory format and warrants further investigation both more broadly and deeply.