The Fundamental Attribution Error is a thought-driven bias that social psychologists use to describe the tendency for people to overemphasize character-based explanations for observed behaviour while underemphasizing situational or contextual explanations. So, for example, we have a tendency to think that successful or unsuccessful people or organizations have done so as a result of their own ideas and actions – as opposed to the fact they might’ve just been in the right (or wrong) place at that particular time.

What I want to explore in this post is the role that the Fundamental Attribution Error plays in the start-up process. How much does an entrepreneur’s idea really matter? Do explanations that focus primarily on the internal capabilities or actions of a firm explain success? Or is success more a matter of aligning a business’s objectives and resources with long-term trends in areas such as demographics, economics, sociology, politics, and technology?

Although somewhat anecdotal, I feel comfortable saying that entrepreneurs often underestimate the significance of the external context in which their idea or business exists.  Many entrepreneurs seem to think about their business as if it existed in a vacuum: “It’s our technology!”  “It’s our management team!”  “It’s our execution!” To be sure, these are all very important considerations, and entrepreneurs would be foolish to ignore them; my point is that you can have the best technology, the best management team, and the best ability to execute, but if you’re selling horse-drawn carriages when people want cars, it doesn’t matter how good you are – you misread the external environment. 

The clever entrepreneur says “my [insert internal explanation here – technology, human resources, operational excellence, etc.] is the source of my competitive advantage.” The wise entrepreneur says “my competitive advantage is a function of the alignment of my internal capabilities, objectives, and a lucid understanding of external environment in which I do business.” 

At the end of the day, it’s probably not completely internal or completely external factors that dictate the success of a start-up.  Surely, there are examples of firms doing well in terrible industries, and terrible firms doing well in great industries. But the fact that so few entrepreneurs (and investors) seem to pay attention to the true structural attractiveness of an industry prior to investing in it is why I believe so many start-ups struggle. Spending the time to understand and align your business with demographics, politics, economics, and social and technological trends is well worth it and will probably keep you from making potentially expensive mistakes.