Marc Andreesson, one of the first big internet entrepreneurs (he founded Netscape), has written an insightful blog post: The Psychology of Entrepreneurial Misjudgment, part 1: Biases 1-6.

It's a long and detailed post, but is well worth reading. In it, he draws on the expertise of Charlie Munger - an 80-something billionaire who cofounded top-tier law firm Munger, Tolles & Olson and is Warren Buffett's long-time partner and Vice-Chairman at Berkshire Hathaway, one of the most successful companies of all time.

It's the first in a series of articles that Marc promises to write, analysing the entrepreneurial insights of all 25 of Mr Munger's suggested forms of 'misjudgement' - how the way our brains work naturally can cause problems for entrepreneurs - and in this first one he covers six:

One: Reward and Punishment Superresponse Tendency

People respond oddly to incentives, and will try to 'game' the system. Therefore you need to be very thoughtful in the structures of rewards and punishments in order to obtain the desired response.

One of the great unwritten Silicon Valley skewed incentive stories was a major datacenter vendor in the late 90's that incented its salespeople based on bookings of long-term datacenter leases, without sufficient counter-goals tied to revenue collection or the customer's ability to pay. Sure enough, soon the company's reported bookings were heading straight up, revenue was flat, and cash headed straight down, resulting in a truly spectacular bankruptcy. The salespeople got paid, though, so they were happy.

Two: Liking/Loving Tendency

Wanting to be liked is a natural human tendency, but it can impede you from making the right decisions. Also, liking other people can impede you from making the right decisions where they are concerned. Being popular is not as much of a priority as making the right decisions so that the company is a success and the people you work with can afford to eat and keep a roof over their heads.

I think these pressures are intensified in a small company versus a larger company, because in a small company everyone tends to know everyone else and people naturally form strong personal relationships within the group -- so the desire to be liked is stronger, and the perceived risk from making decisions that people won't like is higher.

Three: Disliking/Hating Tendency

Humans also have a tendency to seek an enemy to focus their attention on, and unite their own people against the common foe (I'll avoid getting into current politics here!). This can be seen in underworld where gangs end up fighting each other - gradually destroying themselves, but it's also true in the world of entrepreneurship.

I believe startups often overfocus on their competitors. It's the easiest thing in the world to orient yourself in opposition to another company in the same market, and to plan your actions based on what will cause damage to the competitor or block the competitor from getting business.

In the startup world, that often leads to multiple competitors engaged in a shooting war in a market that's still too small for anyone to succeed.

I think it's much better for a startup to focus on creating and developing a large market, as opposed to fighting over a small market.

Four: Doubt-Avoidance Tendency

People get needlessly stressed by uncertainties and try to rush to decisions to avoid this stress. The most effective people avoid this tendency and are comfortable with uncertainty. Employees are particularly prone to stress because of doubt and uncertainty, and you'll need to strike a difficult balance.

Five: Inconsistency-Avoidance Tendency

People don't want to be seen as inconsistent - which means they avoid change. This can be a big problem for entrepreneurs who need to be able to change regularly and rapidly as they get feedback from their market, and circumstances change.

Perhaps this bias is most relevant to how new markets develop. Sometimes you get lucky -- you bring a new product to market, and the target customers all go, great, we'll take it! However, often you get a level of resistance from the market that can be puzzling -- "can't they see that our new product would be better for them than what they have now?"

This in turn leads to the odd dynamic you often see where a startup will field a new product, nobody wants it, and the startup goes belly up. Then three or four or five years later, another startup launches with a very similar product, and this time the market says, hell yes!

I think this is something that every entrepreneur needs to watch very carefully. Sometimes it's simply a matter of timing -- and if people just aren't ready for a new idea, you usually can't make them ready, and you have to wait for them to change or for a new generation of customers to come along.

My favorite way around this problem is the one identified by Clayton Christensen in The Innovator's Dilemma: don't go after existing customers in a category and try to get them to buy something new; instead, go find the new customers who weren't able to afford or adopt the incarnation of the status quo.

Six: Curiosity Tendency

Marc mentions that this is an odd one for Mr Munger to include in a list of faults - because curiosity is generally a good thing, particular in entrepreneurs - and he reports that Mr Munger doesn't actually find much to criticise about it. But we mustn't criticise this inconsistency (as we've seen above) we must relish it! :)

The full post is well worth a read - and I'll be following the series.