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The curse of human biases for LBE developers

Starting a location-based entertainment business (LBE) is fraught with landmines and challenges. Unfortunately, many of these planned businesses never open or fail soon after they open. Owners of poorly performing LBEs often hire our company to identify and analyze the root cause of their problems and develop turnaround strategies for their businesses. Unfortunately, in some cases, the prognosis is terminal. The poor performance is due to incurable root cause mistakes made before the center opened. In other situations, the owners waited too long to call in experts as they depleted all their working capital. So even if their problems are solvable, they don't have the financial wherewithal to make necessary changes.

Here's a summary of some of the significant traps entrepreneurs, including LBE developers, typically fall into based on our 34-years of experience in the LBE industry. Developers planning to enter the LBE industry, take heed!

You are NOT your customer

This is one of the mistakes we see most consistently. LBE developers make decisions about all aspects of their projects based on their personal perspectives and preferences. Rarely are the business developer's preferences and perspectives the same as those of the customers they will serve. To be successful, you need to see through your customers' eyes and think in their brains, not your own. Below are various elements of the 'You are NOT your customer' trap that LBE developers become victims to.

Androcentrism

This is the most common version of "You are NOT your customer." With rare exceptions, women decide which LBEs their families will visit and when they'll go. And even for non-family adult-only venues, women still rule the decision-making. Women make over 80% of all purchase decisions and often have veto power over the decisions they don't make. Men are from Mars, women are from Venus, and when it comes to kids, their story is from a completely different planet. Women think differently than men. Their brains are wired differently. They see, feel, and experience the world differently than men do. They have different wants, needs, desires, and preferences.

Most LBEs are developed by men, designed by men, and managed by men. This introduces a significant gender bias in the LBE's entire design and management, known as androcentrism. You can also call it male-centeredness. Whatever you call it, it typically results in a significant mismatch between all aspects of the LBE and its core customer decision-makers - women

Cohortism

We all know how different Millennials are from Gen Z and older generations. There are also differences between Generation X and Baby Boomers. Too often, the LBE entrepreneur is from an age cohort different than the LBE's target market. This cohort bias creates a mismatch. Decisions about the design, management, and marketing of the LBE are made from a far different generational perspective than is held by their customers.

Cultural faux pas

Less prevalent a problem in the U.S., but one we see all too frequently in our international work, is the attempt to transport a Western model to another culture without making appropriate adjustments for a good cultural fit. (There are also cultural differences in different areas of the U.S.) We've all heard about Disney's cultural faux pas when Disneyland Resort Paris opened - no wine being one. And that move was still within Western culture. Move a Western model into Middle Eastern, African, or Asian cultures, and there are even more challenges.

Classism

Birds of a feather flock together. That is a polite way of saying people like to hang out with people like themselves; whether they want to admit it or not, they are class-conscious. This is just as true in America as in nearly every culture worldwide. There is a big difference between customers who frequent Denny's restaurants and those who dine at Ruth Chris, just as there is a big difference between people who shop at Nordstrom versus Walmart.

To be successful, LBEs, particularly indoor venues, need to target a group of guests with a specific socioeconomic-lifestyle. Suppose the developer isn't from the same group. In that case, there can easily be a mismatch between the LBE's design, finishes, level of service, and management and the preferences of the customers it's trying to attract.

Be aware of your own incompetence

Real knowledge is to know the extent of one's ignorance. Confucius

This wisdom is 26-centuries old. In an issue of Current Directions in Psychological Science, researchers from Cornell University and the University of Illinois at Urbana-Champaign stated, "People tend to be blissfully unaware of their incompetence. This lack of awareness arises because poor performers are doubly cursed: Their lack of skill deprives them not only of the ability to produce correct responses but also the expertise necessary to surmise that they are not producing them. . . People are unaware of their incompetence, innocent of their ignorance."

This phenomenon, also known as the Dunning-Kruger effect, occurs when a person's lack of knowledge and skills in a specific area causes them to overestimate their competence.

This double curse of not having the knowledge and skills needed to produce the correct judgments, which is the same knowledge and skills required to evaluate the accuracy of one's decisions, is one of the most difficult for entrepreneurs to overcome. An example of how this affects LBEs: The skills needed to develop the mix and layout of a center are the same skills necessary to recognize whether the mix and design are correct.

Put simply, people incompetent in any area of knowledge are likewise ignorant of their incompetence. Ignorance may be bliss, but when it comes to developing an LBE, this bliss, more often than not, will produce a poorly performing or failed business.

Many things are counterintuitive

Amazingly, or maybe not so amazingly, if you consider human nature, developers of LBEs continue to make many classic mistakes, so we see history continue to repeat itself. Most of these mistakes have resulted from practices that appear logical. However, the correct approach with LBEs is often just the opposite of what intuition tells someone entering the industry. In a sense, this is a variation of "Be aware of your own incompetence." One intuitive mistake we repeatedly see is "you've got to have something for everyone." The correct counterintuitive approach is the opposite; it's called focused assortment-you focus on one well-defined market niche and then develop a mix that appeals to them.

The emotional trap of 'fun'

We also call this the emotional feasibility study. Many novice LBE developers have their decision-making ability clouded because they get so emotionally caught up in the "fun" of the LBE they are planning. It will be so much fun that they know it will be successful! Fun alone is rarely the primary motivator for people to come. They lose sight of the other factors, including the food and beverage, the socialization, the layout, and the hundreds of aspects of the business's design and operation that must be correctly executed for it to succeed.

Ego and self-serving, and collective bias

Developing a complex project such as an LBE takes an entrepreneurial spirit. One essential component of a successful entrepreneur is ego, that strong sense of self. However, ego is a double-edged sword. Too much ego becomes hubris or arrogance, the sure path to irrational business decisions and failure. Too little ego and confidence aren't sufficient to take on the project risk in the first place or continue pursuing it through setbacks. Ego can be a success driver or a project killer, or both. A successful LBE developer has the ability to take intelligent risks by benefiting from their ego's strengths while mitigating their weaknesses.

The nature of the ego can cause an entrepreneur to fall victim to several biases. One is known as confirmation bias or self-serving bias. When you make a decision, it may be tentative at first, but soon you'll come up with reasons confirming your brilliant move, and you'll ignore all factors that suggest otherwise.

Psychological research shows our desires and emotions influence how we interpret information, even when we believe we are trying our darnedest to be objective and impartial. We are motivated to confirm the decision we have already made. Without being aware we're doing it, we critically scrutinize and then discount facts contrary to the conclusions we want to reach or confirm. We uncritically embrace evidence that supports our conclusions. Being unaware of our skewed information processing, we conclude our judgments are free from bias.

With self-serving bias, people reach conclusions that favor their interests. In other words, self-serving bias distorts how we interpret information.

Entrepreneurs' egos also can lead to collective bias, which can manifest itself in two ways:

• An ego-driven developer may hire "yes" people and "yes" consultants. The developer surrounds himself with people who confirm his decisions rather than with critical thinkers who are not afraid to voice their opinions.
• The entrepreneurs' enthusiasm and often charisma become contagious and create a collective belief that permeates the entire development team. Everyone gets caught up in wanting the project to succeed and believing it will succeed, which creates a shared collective self-serving bias within the whole group.

The bottom line in either scenario is that everyone on the project team, whether consultants or company insiders, is rooting for something they believe in. This unconsciously closes their eyes to the critical judgment skills that are needed.

Research by Drew Weston, a professor of psychology at Emory University, reinforces this idea that people will ignore facts that contradict what they want to believe. His research shows that most of the time, people make decisions based on bias, not fact. In the scenarios used in his study, the strength or weakness of the evidence turned out to be immaterial about 80% of the time. In other words, we believe what we want to, facts be damned.

Selection bias

In an attempt to claim a winning formula for an LBE, many developers go out and look at an existing center and copy it. We sometimes refer to these entrepreneurs as wannabes. On the surface, their plan seems logical. Unfortunately, copying what appear to be successful LBEs can be misleading and dangerous - and become a direct route to failure.

The statistical community frequently cites an anecdote to illustrate selection bias. World War II statistician Abraham Wald was studying the vulnerability of airplanes to enemy fire. All the data showed that certain parts of planes were hit much more often by enemy fire than other parts. So military personnel concluded that reinforcing those parts would increase the planes' survival rate. It seems logical, doesn't it? Wald came to the opposite conclusion: the parts hit least often should be protected more.

Wald came to this conclusion because he understood data's inherent selection bias. The data was from only the planes that returned. It didn't include any data from the aircraft that were shot down. Wald reasoned that a plane would be less likely to return if hit in a critical area. Therefore, even when hit, the returned ones had not been shot in a vital location. Wald argued that reinforcing parts of returning planes that had the most hits would be unlikely to have any benefit.

Selection bias results from looking only at existing and supposedly successful LBEs, not the entire universe, which includes LBEs that failed. Anyone who tries to reach conclusions about the winning formula for a business by studying existing companies falls into this statistical trap. If LBE developers study only successful centers, any relationship they infer between their design, mix, and management and their success will be misleading and possibly wrong. Rather than copying a formula for success, they may replicate the recipe for failure. In addition to the problem of selection bias, many factors can contribute to the success of existing centers that will not be present in the developer's center.

A straightforward example is cost. An older center costed less to develop than one built at today's prices, so what is profitable for the older LBE might not be profitable for a new center. Maybe the center failed initially and was bought by the existing owner for cents on the dollar. Perhaps the current center, although operating, is not generating enough profit to justify its replication elsewhere.

Another shortfall of selection bias is trends. Any existing LBE might have been developed many years ago. Since then, trends in the industry have been changing, so copying its formula won't set up the new LBE for what the future will bring.

Optimism bias

Put simply, this is the tendency for people to be over-optimistic about the outcome of their planned actions. It could include overestimating the likelihood of positive results and underestimating the possibility of adverse events.

In planning LBEs, we often see developers overestimate their revenues and underestimate costs and operating expenses. We often refer to this phenomenon as "seducing yourself with the pro forma."

Is there any hope?

Considering the flawed nature of the human cognitive condition when it comes to entrepreneurs starting businesses, can LBE developers have a better success rate and prevent failure? Perhaps not entirely. Blind ambition will continue to drive many entrepreneurial ventures.

Hopefully, many fledgling LBE developers will recognize the fragility of their human condition when it comes to decision-making and will turn to experienced LBE industry consultants, designers, and producers to guide them through the minefields of developing a successful entertainment venue. Malcolm Gladwell's book, Outliers: The Story of Success, says it takes 10,000 hours, approximately ten years, to be a world-class expert in virtually anything. Entrepreneurs starting an LBE need to seriously consider their lack of expertise regarding Gladwell's 10,000-hour rule and team up with veteran industry experts.

Entrepreneurs working on LBE business development frequently approach our company to ask what our fees are. When we tell them, they often respond, "It's not in my budget," or "I can't afford it." Well, you get what you pay for. This may sound self-serving, but it's aimed at preventing industry roadkill. The failure of any LBE hurts the industry's reputation and the ability of future entrepreneurs to lease store spaces, develop properties, and access loans and capital. Entrepreneurs who say they can't afford expert guidance are usually the ones who most need to save themselves from the blissful ignorance of not recognizing just how much help they need. Successful entrepreneurs understand how their inherent sense of self, ego, and cognitive biases affect their decisions.

Entrepreneurs that don't meet the 10,000-hour rule have a very low probability of success unless they marry themselves to a company or expert who does. That rented experience can make all the difference between success and failure. It's the difference between starting a business at the top of the learning curve versus starting at the bottom. The expert should not be a "yes" consultant or designer. "Yes" consultants will constantly agree with their clients to keep them happy to be assured of getting more work from them. This practice only supports collective bias. A good consultant has no hesitation in letting clients know when they are going down the wrong road, even if it creates the risk of not getting future work from the client.

Our 34-year-old company is one of several LBE industry consultants, designers, and producers. We are not a perfect match for everyone. If you are an aspiring LBE developer, search out industry experts, put adequate money in your budget, and hire the best you can find to ensure your project becomes a 10-year+ successful LBE that joins the ranks of industry evergreens.

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