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