Seeing Only What You Want: The Cost of Overlooking the Bigger Picture

One of the most insidious influences on human decision-making is the cherry picking bias, the tendency to selectively use data or evidence that supports our preconceived point of view while ignoring information that contradicts it. This cognitive bias often masquerades as rational analysis but can lead to misguided conclusions with long-term effects and consequences.?

How to understand the cherry picking bias?

At its core, the cherry-picking bias is about filtering information to confirm what we already believe or want to be true. It’s a cognitive shortcut that creates a feeling of easy decision-making, but it often clouds our judgment.?

This bias is pervasive in fields like investing, politics, and even everyday decision-making. For instance, someone evaluating a decision might focus on evidence that feels familiar or reassuring while discarding the inconvenient or contradictory data. This approach often prevents a full understanding of the situation; the risks and the opportunities involved.?

The similarities and differences with other fallacies

When examining the practice of cherry-picking bias, it’s important to compare it with related fallacies to understand their nuances:

• Confirmation Bias: ?

The tendency to seek out, interpret, and remember information that supports preexisting beliefs, often leading to statistical errors or flawed conclusions.?

• Clustering Illusion: ?

A fallacy where similarities in data are emphasized while differences are overlooked, leading to a biased or incomplete interpretation of patterns.??

• Publication Bias: ?

The tendency for academic journals to prioritize publishing positive or significant findings over null or negative results, distorting the public's perception of research outcomes.?

• Data Dredging: ?

The practice of sifting through large datasets to find patterns or trends without a clear hypothesis, which often results in identifying coincidences as meaningful relationships.?

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The Unseen Consequences of Selective Thinking??

Cherry-picking in venture capital valuations involves selectively presenting or emphasizing data points that support a higher valuation while ignoring data that might suggest a lower one. This can mislead investors, partners, or acquirers. Here are examples of cherry-picking in venture capital:?

1. Highlighting Revenue Growth Without Context?

• Example: A startup presents an impressive year-over-year revenue growth rate (e.g., 300%) but fails to disclose that the revenue base was initially very small (e.g., from $50,000 to $200,000).?

• Impact: The growth appears exponential, masking the limited scale of operations.?

?2. Selecting Specific Markets or Customers?

• Example: A company operating in multiple markets emphasizes its performance in a high-growth region (e.g., Asia) while downplaying stagnant or declining results in other regions (e.g., Europe or the US).?

• Impact: This skews perceived market potential and scalability.?

3. Focusing on Non-GAAP Metrics?

• Example: Highlighting "adjusted EBITDA" or "contribution margin" that exclude significant operating expenses like marketing, R&D, or staff compensation.?

• Impact: This inflates profitability, making the startup appear more financially sound than it truly is.

4. Emphasizing Total Addressable Market (TAM)?

• Example: Using inflated TAM projections to imply vast growth potential, even though the company realistically targets only a small, niche segment of the market. Many Companies think if they open in India because of the large population, the thought is even if they get a small number of customers, it will be enough to thrive.?

• Impact: It creates an illusion of scalability that doesn't align with the company's capabilities.?

?5. Cherry-Picking Comparable Companies?

• Example: Using valuation multiples (e.g., EV/Revenue, EV/EBITDA) from highly successful or overvalued public companies while ignoring more relevant but less favorable peers.?

• Impact: This inflates the perceived fair valuation of the startup.?

?6. Selective Timeframes?

• Example: Highlighting metrics from an unusually strong quarter while ignoring longer-term trends, such as declining customer acquisition or retention rates.?

• Impact: It presents a distorted view of the company’s consistent performance.?

?7. Obscuring Dilution or Cap Table Issues?

• Example: Emphasizing gross valuation metrics without addressing the significant equity dilution from convertible notes, SAFE agreements, or employee stock options.?

• Impact: Investors may underestimate their actual share of ownership.?

?8. Relying on Vanity Metrics?

• Example: Focusing on metrics like total app downloads, registered users, or website visits while ignoring active users or engagement levels. Look at not how many registered users but out of those how many are paying, how many are active, what do they use, and more granular information. Such as “Last used on” Dates, etc.?

• Impact: It exaggerates user interest and traction without showing real value creation.?

?9. Ignoring Customer Acquisition Costs (CAC) Trends?

• Example: Presenting a low CAC from early-stage organic growth or a specific campaign while omitting the rising costs of sustaining customer growth over time.?

• Impact: It suggests a more favorable unit economics outlook than is realistic.?

?10. Downplaying Churn Rates?

• Example: Highlighting lifetime value (LTV) calculations based on the highest-value customers while omitting high churn rates in lower-value customer segments.?

• Impact: It overstates the predictability of long-term revenue streams.?

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Real world Encounters with The Cherry Pick?

Cherry-picking bias in venture capital involves selectively highlighting successful investments while downplaying or ignoring failures, leading to a skewed perception of a firm's performance. While specific case studies explicitly detailing cherry-picking bias are scarce, certain real-world instances illustrate how this bias can manifest:?

Byju's: Overemphasis on Success Amidst Underlying Issues?

Byju's, an Indian edtech company, was once valued at $22 billion in 2022, attracting investments from prominent backers like BlackRock and Mark Zuckerberg. The company showcased its rapid growth and high-profile sponsorships, such as the Fifa World Cup, to project success. However, this emphasis overshadowed significant governance issues, including delayed account filings revealing nearly $1 billion in losses and legal battles over financial discrepancies. The focus on positive aspects led investors to overlook critical red flags, culminating in a drastic devaluation of the company.??

Cherry-Picking Customer Metrics in Startup Valuations: The Charlie Javice Case and Frank's $175 Million Fraud?

In 2021, JPMorgan Chase acquired the college financial planning startup Frank for $175 million. The Department of Justice later charged its founder, Charlie Javice, with fraud for allegedly inflating the company's user base from fewer than 300,000 to over 4 million. This case highlights the dangers of cherry-picking data to artificially boost valuations:?

• Selective data presentation: Javice allegedly used fabricated data to inflate the number of registered users on the platform, creating a misleading narrative about the startup's scale and market penetration.?

• Vanity metrics over substance: The focus on total user numbers disregarded actual engagement or revenue generation, which are more reliable indicators of a platform’s value.?

• Manipulating Due Diligence: When pressed by JPMorgan for verification, Javice reportedly hired a data science professor to create millions of fake accounts, further skewing the data provided during the acquisition process.?

• Outcome: The discrepancies only became apparent after 70% of emails sent to purported customers bounced back, causing JPMorgan to shut down the platform. The bank's CEO, Jamie Dimon, later referred to the acquisition as a "huge mistake."?

This case illustrates how cherry-picking or outright fabricating data can lead to catastrophic consequences, not just for the acquiring entity but also for the startup’s reputation and leadership. Entrepreneurs and investors must scrutinize claims and demand transparency to avoid such pitfalls.??

How to mitigate the Cherry Picking Bias?

• Use statistical analysis?

Let data-driven insights guide your decisions, to identify meaningful trends rather than relying on isolated data points.??

• Look at the bigger picture?

Reflect on the full scope of available information, not just the parts that confirm your beliefs.?

• Be transparent?

Clearly document and share your decision-making process, including the evidence used.??

• Diverse sources?

Engage with voices that challenge your own. Different viewpoints can illuminate blind spots.?

• Check for biases?

Regularly question your own assumptions. Challenge yourself to find evidence that disproves your initial conclusions.??

• Explore alternatives?

Test different possibilities or viewpoints before making a decision. Evaluate other scenarios or explanations to ensure your conclusions are thorough and balanced.?

Conclusion

Cherry-picking bias often stems from the human desire to confirm what we already believe, but it comes at a cost. When we selectively focus on data that supports our preconceptions, we risk missing valuable insights and opportunities. Over time, these missed chances can compound into larger regrets, whether in personal, professional, or financial decisions.?

The antidote to cherry-picking bias lies in curiosity and openness. By actively seeking a fuller picture considering data that challenges as well as supports our decisions we can improve our judgment, avoid costly errors, and make more informed choices. In a world full of noise, the ability to critically evaluate all evidence is a rare and invaluable skill.?

About ACE Alternatives

ACE Alternatives (“ACE”) is a leader in managed services in the Alternative Assets sector like venture capital, private equity, fund of funds, real estate, and more. Leveraging a proprietary tech platform and extensive industry experience, ACE offers 360-degree tailored solutions for fund administration, compliance and regulatory, tax and accounting, investor onboarding and ESG needs.

The fintech was founded in Berlin in 2021 and has since established itself as one of the fastest growing alternative investment fund service providers in Europe. ACE is currently used by over 45 funds. In 2024, ACE received seven-figure funding from Bob Kneip to expand into new markets. ACE’s vision is to redefine fund management by demystifying complexities and promoting transparency.

Media Contact: Rhea Colaso

For more information visit us at https://www.ace-alternatives.com/

Sources:?

Rolf Dobelli, “The Art of Thinking Clearly” (2013)

CNBC

FasterCapital

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