The Science of Entrepreneurial Decision Making and the Importance of Real Identity in Networks

The Science of Entrepreneurial Decision Making and the Importance of Real Identity in Networks

In the world of entrepreneurship, making the right decisions can often be the difference between success and failure. But what if there was a scientific approach that could improve an entrepreneur's chances of success? A randomized control trial conducted by Management Science suggests that entrepreneurs who behave like scientists actually perform better than those who do not. By adopting a scientific approach to decision making, entrepreneurs are more likely to pivot to a different idea when necessary and are not more likely to drop out than their counterparts.

So, what exactly does it mean to behave like a scientist? Well, it involves taking a more systematic and evidence-based approach to decision making. Instead of relying solely on intuition or gut feelings, entrepreneurs who behave like scientists gather data, analyze it, and make decisions based on the evidence. This approach improves precision and reduces the odds of pursuing projects with false positive returns while increasing the odds of pursuing projects with false negative returns. In essence, it allows entrepreneurs to make more informed decisions and increases their chances of success.

In the realm of network businesses, one key choice that founders must make is how much to tie user profiles to real identity. Profiles can range from purposefully anonymous to using real names. The correlation between tying profiles to real identity and the endurance and value of a network is often overlooked. While using real identity in user profiles may not be the easiest path when starting out, it has been observed that networks with profiles tied to real identity are more likely to grow and become valuable businesses in the long run.

LinkedIn serves as a prime example of the power of using real names in user profiles. Although the platform experienced slow growth in its early years due to the higher barrier to activation, the use of real names increased user engagement. This, in turn, led to the growth of size, density, and activity within the network. The more active and committed the users, the stronger the network effects become. On the other hand, networks that allow for more anonymity may experience easier initial growth, but tend to burn out and produce less value in the long term.

Facebook's success in getting people to use their real names is attributed to their launch in a constrained environment of perceived safety: college. By starting off in a niche where it made sense to show real names, Facebook was able to establish a connection between online profiles and personal identity in real life. However, this vulnerability also made it easier for competitors to come along and steal users, as the network effects were not as closely tied to users' real identities.

Platforms like Twitter, Reddit, and Snapchat have managed to maintain their presence despite usernames differing from real names. These semi-pseudonymous networks have strong network effects because they provide users with a persistent online identity, partially tied to their real-world identities. People are emotionally invested in creating and maintaining their online reputations, even if they are semi-virtual. While these networks are successful in their own right, they do not match the success of real-identity networks.

However, it's important to note that the success of a network ultimately depends on the level of engagement. Network effects occur when more users result in more value for existing users. A dense and highly active network will always outperform a larger but less active one. In the competition between network effects companies, those with more powerful network effects will come out on top. Simply having network effects is not enough; it's the strength of those effects that truly matters.

Friendster serves as a cautionary tale in this regard. The platform launched with real names and experienced rapid growth. However, it never achieved stability due to technological and product experience issues. Focusing on real names and facing heavy criticism ultimately hindered its success.

From these insights, we can draw three actionable pieces of advice for entrepreneurs and founders:

1. Adopt a scientific approach to decision making: Gather data, analyze it, and make decisions based on evidence rather than intuition or gut feelings. This will increase the precision of your decision making and improve your chances of success.

2. Consider the importance of real identity in network businesses: While it may be tempting to allow for more anonymity in user profiles, tying profiles to real identity can lead to higher user engagement and stronger network effects. This, in turn, increases the chances of your network becoming a valuable business in the long term.

3. Prioritize engagement: Building a dense, highly active network should be a priority. Network effects occur when more users result in more value for existing users. Focus on creating an environment that encourages users to engage with your platform regularly, as this will ultimately determine the strength of your network effects.

In conclusion, a scientific approach to entrepreneurial decision making and the use of real identity in network businesses can greatly impact an entrepreneur's chances of success. By adopting a systematic and evidence-based approach to decision making and considering the benefits of tying user profiles to real identity, entrepreneurs can increase the precision of their decisions and build networks with stronger network effects. Prioritizing engagement and creating a highly active network will further contribute to long-term success.