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I want to welcome Laura Wong and she is
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a management professor here at Wharton
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and she's going to tell us about her new
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research which has to do with investors
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using a gut feel to make decisions
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important investment decisions and I
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think it's based mostly on angel
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investors and it's a little bit
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counterintuitive it's not quite what you
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would think investors are relying on so
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we're anxious to hear about that so
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thank you for coming in hi thanks for
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having me I think that the best way to
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get into it this is to ask you to do a
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short summary of the of the arc of the
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paper sure so what we found in this
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research was well actually I'll step
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back a little bit the the origins of
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this paper was we're really interested
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in how investors make decisions and this
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one thing kept coming up right so they
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would talk about the size of the market
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they would talk about the product but
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investors kept coming back to well then
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I rely on my gut feel or then I invest
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based on my gut feel um you know I've
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even heard stories of investors kind of
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just saying you know I invest because I
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rub my tummy and that's how I make my
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investment well we would have expected a
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right and so I thought that was really
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interesting um and I thought it was
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really kind of critical to understand
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what is this got field that they're
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they're referring to and so the paper
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really sought out first we what we
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wanted to do is to do this investigation
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of what do investors actually mean when
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they say that they invest based on their
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gut feel and what we found actually was
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really fascinating was that not only do
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they use their gut feel to make their
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investments but that there's actually a
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practical reason a reason for why they
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use their gut feel and it makes sense in
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terms of looking at their outcomes and
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how effective they are so one of the big
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findings of this paper in particular and
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we're continuing on some follow-on work
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from here but is that decisions are not
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all the same right we tend to think of
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decisions as being right or wrong but in
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the entrepreneurial context investors
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are very willing to be wrong in fact
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they know that they will be wrong on a
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lot of there
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investments and so in terms of their gut
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feel it doesn't actually make a
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difference in terms of being right or
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wrong on any one given investment
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decision that they're making but it
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allows them to identify the home runs
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when they rely on their gut feel they
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may be wrong on a lot of different
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investments but they're actually going
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to be able to be more likely to pinpoint
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that home run so if we think about it in
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terms of baseball averages right so
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investors perhaps might have if your if
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your goal is to have a very high batting
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average your gut feel might not be as
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effective but if you're willing to have
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a really low batting average but hit
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more home runs then perhaps you want to
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rely on your gut feel so this is partly
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a strategy that works because of the
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level of investment meaning it's like
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very very early stage when a lot of
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things aren't proven and you can't
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Marshall all the evidence you would like
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because because this is just a new thing
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let's examine but it probably is input
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it but you're going to take a risk on it
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right so we were looking at the very
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earliest stages of ventures right so
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we're looking at angel investors who
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typically are the first outside external
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form of financing for for these
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entrepreneurs and you're you're at this
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stage where perhaps you you may have a
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prototype or maybe you just have a
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glimmer of an idea you're not exactly
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sure what the market is gonna look like
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there may not even be a market out there
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and so there's lots of hard data there's
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numbers and facts and figures that
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you're able to put down but a lot of
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those numbers are based on estimates and
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hopes and dreams and guesses and so that
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hard data is actually not as reliable to
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these investors as their own experience
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the things that they're getting from
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their own mental schemas and prototypes
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and mental models that they that they
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have really developed through lots and
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lots of investments and that's kind of
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where their gut feel is coming from and
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that becomes a more reliable factor to
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them in kind of gauging where this is
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going to be you know in three years five
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years ten years down the line that's an
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interesting point they're not just
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throwing darts at the dartboard they're
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basing their decisions on a lot of
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experience and so it's a sort of more of
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an educated guess that's right right so
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you know so we hear the term
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intuition and gut feel and a lot of
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times we think about you know oh this is
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something where it's going to be
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something that's that's very biased or
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it's going to be something that is just
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based on on some arbitrary kind of thing
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but their gut feel is actually based on
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years of experience investments that
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they've made that have gone well that
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have gone poorly so so it's really
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something that is a criteria that they
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rely upon and that in fact has a basis
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for for this reliance so they're pretty
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good at this or they wouldn't get to
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keep doing it you know it's funny some
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of them we've looked at the the
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investors that we looked at in one of
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our samples had all approximately around
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the same amount of experience but we've
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also done studies where we looked at
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different levels of experience right
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some that have maybe only been investors
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for five years some that have been doing
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it for 35 years and you do get lots of
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variants for example we had one investor
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who you know he bought his house that he
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lives in now in Malibu off of one
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investment that he made and he said you
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know sometimes I can tell within five to
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ten seconds of meeting somebody whether
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or not I'm gonna invest in them right so
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there is a different and there's others
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who do lots of due diligence right due
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diligence probably for three months six
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months however long they do and then
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they kind of say well you know
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throughout the course of that it was
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this this this judgment that I had at
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the very end of it that I used my gut
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feeling to to make this investment so
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there's there's all sorts of ranges of
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this what are the key takeaways from
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your research would you say I mean I
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think one of the key takeaways is that
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this is a highly uncertain environment
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right there is extreme and certainty in
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this environment and so the way that we
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think about the ways in which we think
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about decisions are not going to be the
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same based on the different contexts
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right so in the entrepreneurial
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investment context here you're looking
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at this portfolio strategy where we're
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not looking at was the decision a good
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one or not a good one we're really
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looking at it in terms of I'm willing to
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have nine really bad investments that I
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make and forsake that for one huge one
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huge investment that turns into
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extremely profitable investment for
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myself right so there's this portfolio
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strategy and so decision making is going
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to be different based on that the other
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thing that I think was really
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an important takeaway from this is that
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there's different types of data out
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there and the investors got feel is
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actually trumping the data behind
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business viability right so the hard
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data so things around financials or
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market size or um you know product that
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their gut feel was a more important
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consideration to them than some of these
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other things right and so that kind of
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matters it's not to say that those
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things don't matter but it's that
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there's lots of different considerations
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to consider and we tend to have this
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very economic driven model of how
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investors should make decisions when in
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fact perhaps we should consider these
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behavioral and micro level influences at
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least at that early stage yeah and also
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when you talk about that they are maybe
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doing 10 investments and maybe one pays
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off but in general they're doing small
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stakes right they're not they're not
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betting the farm on each one of these is
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that correct right relative to their
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their net worth or to their wealth these
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are these are small stakes right so um
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you know it could be 20,000 50,000 that
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they're investing but we also are
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continuing to look at this in terms of
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follow-on investments do they continue
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to invest going forward if you look at
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some of the venture capitalists right
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the Sequoias of the world's right
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they're gonna have a very different sort
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of criteria a different way of investing
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so if you hit on one Instagram that
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that's a even if it was only a
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twenty-thousand-dollar investment you're
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not doing too bad yeah I mean these
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extraordinarily profitable investments
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are returning things in spades so were
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their conclusions here that surprised
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you I mean we were a little bit
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surprised that gut feel had this kind of
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bifurcated result where it doesn't
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actually necessarily help you identify
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what's going to bring you a return or
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not a return but that it it does have
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this effect in terms of identifying
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those extraordinarily profitable
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investments you know that was kind of
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surprising because it suggests that the
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way that we think about you know we hear
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lots of this type 1 type 2 types of
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decision-making right do you rely on
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your intuition or do you rely on data
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and it seems to suggest that there's
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room for both and then it's not quite
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that clear-cut where where intuition is
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necessarily this bad thing it does it
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does also depend
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your experience it does append on lots
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of other things so what are some
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practical implications so if you're an
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investor go with your gut don't ignore
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your gut entirely how would you how
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would you come away with some practical
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implications for you know one way that I
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always that I've always thought was
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interesting to think about this is you
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know I heard this quote at one point
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that was you know some people go with
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their their brain and some people go
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with their heart and before you decide
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whether to go with your brain or your
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heart you should decide whether you have
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a better heart or give you a better
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brain right and so it's a little bit of
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that right you want to think about you
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want to think about the criteria that
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you're using you want to think about how
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you're making decisions but if you're
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perhaps a very very early investor in
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terms of you maybe this is your first
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investment you want to actually perhaps
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think about this and and triangulate and
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look at all the different you don't help
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your great exactly exactly so I think
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that that goes into it uh maybe this is
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an easy one but what misperceptions with
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the public have about how this all works
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are they out there thinking this is
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entirely a rational process where we're
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just looking at the numbers and and
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weighing things and then making the
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decision well I think one of the one of
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the things you already touched upon is
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that sometimes people will see this and
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they say okay this the conclusion here
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is go with your gut right and that's not
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necessarily the main sort of take away
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that we would like God feeling and the
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investor gut feel is it's this very
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complicated sort of emotional cognitive
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sort of thing that's that's happening
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and so so that's one thing to kind of
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consider the other thing is that it
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tends to suggest that there's this um
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that that entrepreneurs can somehow game
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the system right that if you're able to
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present yourself in a certain way or
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caterer in a certain way that perhaps
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investors will then be somehow tricked
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into investing in you and so that's
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something that weird i'm doing a lot of
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follow-on research with some co-authors
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to look at you know the the influence of
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you know the the the impact of
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authenticity versus catering to what you
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think the investors want and lots of
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implications for could there could this
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introduce bias right if investors are
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investing based on what their gut feel
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is could this maybe be a
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a shroud for them than investing based
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on their own biases or their own sort of
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reasons that they can it's this cover
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for for how they're actually investing
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and so these are all things that that
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I'd like to continue looking at because
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I think they're important to uncover and
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how does your research differ from other
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research in this area you know I think a
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lot of the research that has looked at
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entrepreneurial finance and the way that
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investment investors make decisions has
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been very macro has been much more
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economically driven looking at these
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hard factors right and so this is really
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looking at those non codify factors
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these subtle signals and cues that are
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actually driving decision making and so
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a lot of times we look at these criteria
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and we're actually able to map them out
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and very quantifiably look at them and
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so what we're trying to do is really
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take gut feel and and this this perhaps
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nebulous concepts and quantify that and
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look at how are these how are these
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these subtle factors actually driving a
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very distinct process and you've alluded
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to a couple of areas that you're going
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to look at and actually we're to sum up
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what you're going to do next with this
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with this line of thinking yeah I think
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um you know I I'm really interested in
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all of these factors that are not
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necessarily these distinct factors that
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we typically think about so like I said
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these these subtle signals and cues and
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biases that might be driving important
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decisions and how that impacts both the
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decision-making as well as the ultimate
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outcomes thanks for coming in and drink
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so much thanks
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you
