How intuition works in venture investment: the holistic effect on decision making

ABSTRACT

To investigate into the cognitive perspective of venture investment, we performed a field experiment to explore the features and the effectiveness of the intuitive and analytic cognitive modes in the investment decision process. The results showed that intuitive investors care more about the business plan and benefit from the balanced and integrated consideration of both business plan and the entrepreneurial team to make more effective investment decision. The study’s contributions to multiple topics and future directions are discussed.

KEYWORDS:

• Intuition
• cognitive mode
• venture investment
• decision process
• ecological rationality

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Neil Shen, Sequoia Global Managing Partner, Sequoia China Founding Partner; David Rubinstein, Founder of Carlyle Group.

2. Because it was a real competition organized by the competition committee, we cannot control the separation to be strictly random. We controlled the personal-level demographics of the judges to eliminate the influence.

3. The judges might be aware that they were given different judgement forms, but they had no idea about the experiment or that they were separated into two groups.

4. Because SUR is not applicable to COX proportional hazards model, we didn’t employ SUR here. We employed SUR in robustness check with an alternative dependent variable to test H3–5.

5. Here we suggest a careful interpretation of the coefficients of interaction terms in the logit models. The significant coefficients of interaction terms between Intuition with the Business Plan Score and the Entrepreneurial Team Score means that generally in terms of the overall sample, the interaction effects were statistically significant. But the interaction effects for each observation differ as the other covariates take different values. However, when we calculated the interaction effects as a function of “predicted probability that Investment Decision = 1”, we still found significant difference between the results of Business Plan Score and Entrepreneurial Team Score. For Business Plan Score, the interaction effect always fluctuated around 0 and had no significance. While for Entrepreneurial Team Score, the interaction effect was always positive and had significance when the value “predicted probability that Investment Decision = 1” was around 0.5. (see (Ai and Norton 2003)

6. Here we also suggest a careful interpretation of the coefficients of interaction terms in the Cox models. Since Cox model is also nonlinear, the significant interaction coefficients suggested the interaction effects to be statistically significant in terms of the overall sample in general. But for each specific observation the interaction effect differs. The models introducing interaction terms with full sample served as robust check for the main models. Taking the results of both Table 4, Tables 6 and 7 into the consideration, the empirical results offered supports for H3b, H4b and H5.

Table 7. OLS Regression analysis (by group): dependent variable—sales increase (H3, H4, and H5).