1. The Dunning-Kruger effect and other cognitive biases
The Argentinian actor Ricardo Darín, in the fabulous film “The secret in their eyes”, awarded an Oscar for the best foreign film, defined in an anthological scene two types of idiots: the one who knows he is an idiot and is therefore harmless, and the one who thinks he is a genius and does nothing but generate problems.
The truth is that we are all exposed to behaving like both kinds of idiots in many fields, as modern psychology has amply shown. This is the “Dunning-Kruger” effect, discovered by social psychologists David Dunning and Justin Kruger, which is defined as the inability to recognize our own ineptitude. It is a cognitive bias that means that when a person learns a little about a new subject, their level of confidence increases disproportionately, creating an illusion that makes them feel like an expert in that field. Once a maximum has been reached, which is reached with relatively little knowledge, that person begins to be aware of how much they ignore, progressively reducing their level of confidence to a minimum.
The figure below, widely demonstrated in numerous studies, shows how our confidence in a subject evolves as our competence in it increases.
When we start our activity on a new field, we are ignorant and we know it (Darín would say that we are “harmless idiots”). Surprisingly, our level of confidence evolves very rapidly as we acquire knowledge, in fact far beyond what the knowledge we have acquired would justify. This brings us to “Mount Stupid”: we are “dangerous idiots”, still incompetent in this matter, but with a high level of self-confidence generated from little experience.
Beyond this point, we are becoming aware of how much we still have to learn and we drastically reduce our faith in our abilities. This brings us very quickly to the “Valley of Despair”. Only a long learning process will slowly but progressively raise our confidence, climbing the “Slope of Enlightenment” until after much effort, reaching a “Plateau of Sustainability” where we feel like experts and we truly are.
This effect is constantly appreciated in multiple areas and gives rise to ultracrepidarians, people who speak with authority on topics they do not know or master. Sports, politics, economics, public health… It is the explanation why so many of us have recently felt like armchair epidemiologists.
Dunning-Kruger explains among many other things why 93% of American drivers consider that they are better than the average, according to a study by Acta Psychologica. It also explains why 84% of French men believe their abilities as lovers to be above the average citizen, according to Nassim Taleb in his book “Black Swan”.
To complicate matters further, our minds have a dangerous tendency to make inaccurate predictions of the future from little information about the past, an effect called the narrative fallacy, described in depth by Taleb himself. We are programmed to assume causality from a sequence of events, without enough evidence, and to extrapolate the conclusion drawn into the future. Failure to do so requires a considerable effort of self-control and critical thinking.
To top it off, we are also victims of another cognitive bias, the illusion of validity, thoroughly described by Nobel Prize winner Daniel Kahneman in his work “Thinking fast and slow”. Its consequence is that the subjective confidence that we associate in our mind with an idea has a low correlation with its precision. That is to say, often when studying a problem or planning a project we make a movie in our heads in which everything makes sense, and we feel confident about its reliability from our intuition, even before having dedicated the effort required to study the facts objectively.
2. The importance of feasibility studies conducted by experts
In the US, according to the Small Business Administration (SBA):
20% of new companies fail in their first year and 50% do not reach 5 years
Obviously, the percentage of failures will be higher in the case of companies launched by people who do not know the target market thoroughly.
Foreign executives, businesspeople, entrepreneurs, and professionals often find, as they begin their American adventure, that everything in the US is familiar, courtesy of Hollywood and the television, a sensation reinforced by short visits they may have made in the past. This, which could be an advantage, is actually a serious problem because the reality is that the cultural and environmental differences between this country and the rest of the world are profound. The nuances in many respects are subtle, you continue to learn about them after many years living in this nation. Even executives used to doing business around the world are often surprised by the quirks of the business environment they find here.
When considering a project to enter the US market for a foreign business, it is essential to dedicate the effort necessary to be able to overcome “Mount Stupid” so that a strategy can be defined with enough knowledge to have possibilities of success.
This implies conducting a feasibility study that explores the target market and analyzes key elements such as customers, competitors, prices, costs, sales channels, suppliers, necessary resources, entry barriers, trends, regulations and others specific to the market. This will make it possible to detect existing competitive advantages and disadvantages (strengths and weaknesses), opportunities, risks and threats.
Only after careful analysis can we detail and compare alternative marketing strategies, draw up a reliable budget and prepare a solid business plan with a chance of success.
The analysis will be different for each of the product or service market segments that the company could potentially bring to market. It is advisable to initially focus on a small number, preferably those with the greatest potential, but overly limiting the number before you have done a first analysis can result in significant missed opportunities.
To achieve the level of knowledge necessary to achieve these objectives, it is highly recommended to create a multidisciplinary team that includes experts from the company, the products or services that can be marketed, the process of entering the US market and the target sector. Otherwise we will run the risk of making important decisions near the “Mount Stupid” that will seem perfectly valid.
This approach will also diminish the risk of running into of “unknown unknowns”, a concept popularized by the former US Secretary of Defense, Donald Ramsfeld.
These are factors that will have a considerable impact on our project and of which we are not even aware. We will never be able to identify them all, obviously, due to the possibilities of “black swans” or very low probability and high impact events, as we have seen in 2020, but we will reduce the risk of the project by carrying out the analysis with a suitable team that includes in-depth knowledge of the target market and sector.
A useful technique during the feasibility study to combat the effects of the narrative fallacy and the illusion of validity, which was initially proposed by Gary Klein and popularized by the aforementioned Daniel Kahneman, is the “pre-mortem” analysis.” The idea is for team members to imagine a scenario in which the project ended in failure and independently propose the factors that caused it. Numerous studies have shown that this approach, or variations of it, contribute to acquiring a more realistic view of the difficulties and risks of the project, leading to more solid plans with a greater probability of success.
Markentry USA works closely with its clients in all phases of the life cycle of their US market entry projects. We always propose as a first step the completion of a careful feasibility study to explore and calibrate the existing opportunities before assuming significant costs, so that an efficient strategic plan with a high probability of success can be defined.