Discuss: People are irrational, so don’t put too much time on testing product-market fit

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Discuss is a format where you can share insightful answers to interesting startup, entrepreneurship, and tech questions. Drop your thoughts in the comments section below.

Let’s roleplay for a moment here. You’re the founder of a rising technology startup and you have a new product idea. You need to test whether there is a market for the product before expending more resources to deploy it. What will you do?

There is only one correct answer for an economist. We use the mindset of an economist here because we’re dealing with microeconomics or maybe even macroeconomics if your startup is that groundbreaking. For simplicity, the options are limited to only six. If we list all possible real-life options, we would be here for all of eternity.

1. Create an email list of users by gathering your contacts from various industries and professions. The first list is a diverse group representing both your target market, and the second one is a control group, the general population. Email them a survey, asking them if they would buy the product. Perhaps, offer a gift card too as an incentive for participation.
2. Create a landing page and get it online with a nice domain name. Place some polished concept artwork and make it sound fancy. Announce either on the forums or through a press release that the product is being developed and you are accepting sign-ups for early access to the beta version.
3. Do market research and gather the latest data from available online sources. Spend a lot of time reading articles to understand the target audience, industry, timing, etc. Do a thorough analysis using hard data to determine if there is a market fit.
4. Consult with many industry experts who have experience working with the type of product you have. Use their guidance to gain insights into the space and aggregate the wisdom of the crowd.
5. Hold a meeting with your company, and invite your friends and family members as well. At the meeting, discuss the product idea as a group and collectively find an answer. You reserve the right to cast the final vote and make the final decision.
6. Go with your gut and decide either right then and there or after a few days whether you will launch the new product or not. If you choose to deploy, use a small amount of resources in the first release to test the waters and reinvest a large amount later on if it works.

Which option did you choose?

The answer is: F. Go with your gut.

Why is this answer correct according to economics?

If you answered incorrectly, you were most likely thinking of this problem in microeconomic terms with the simple concept of supply and demand. You might even be a bit further along the way and considered opportunity costs and deadweight losses.

But this is a behavioral economic problem. First, know that people are not rational decision makers. Based on the Nobel Prize-winning work in economics by psychologist Daniel Kahneman, we know that there are two systems when making decisions:

• System 1: Swift and rapid decision making—a fight or flight response
• System 2: Slow and derivative and less prone to failure

Now, why exactly should a startup founder go with System 1 instead of System 2 to make a decision? There are several reasons:

1. Startups rely on their speed to survive. This is a defining trait of startups. The fact that they are able to use lean methodology and dish out products at an alarming pace and then pivot their business model if it goes wrong is what gives them an advantage over large corporations.
2. This is a gamble. It is similar to deciding whether to roll the dice or not and wager a certain amount of money. Sitting here and deciding whether or not you should roll the dice through elaborate means is a waste of time, energy, and resources. You know you shouldn’t be gambling anyway.
3. Consider uncertainty in economics. While it is rational thinking to strategically make a decision, it is hubris to think that you can, with 100 percent or at the very least an acceptable amount of certainty, move your company forward based on the results of a market test, survey, meeting, or otherwise.
4. The reasons can go on and on.

But to focus our discussion on what is truly going on here, picture this: You are answering a question dealing with irrational economics. You must imagine that every person you interact with to find out if your product has a market fit is behaving irrationally.

Let’s discuss