Hi! Welcome. You being here means more than you know. Knowing it resonates with you keeps me going. I'm Lavena Xu-Johnson. I write about psychology for founders. Why? Because scaling a business means knowing ourselves first.
Happy Tuesday, founders,
Let’s quickly do a little experiment.
Imagine I present you with two monetary options:
Click on the one you would choose
Next, which would you choose between these:
Click on the one you would choose
Whichever you picked, hold that thought, I'm revealing what the research found below.
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The certainty effect
In 1979, Daniel Kahneman and Amos Tversky published what would become the most cited paper in the history of Econometrica: Prospect Theory. A direct challenge to the dominant economic assumption of the time: that people make decisions by rationally calculating expected value.
Seven years later, building on that foundation, they went further. In Rational Choice and Framing of Decisions, they designed the experiment you just did above to test a specific question: Does the presence of certainty alone change how we evaluate options?
When given the first set of options, 78% of participants chose Option A with the guaranteed $30, even though the expected value of Option B ($45x0.8=$36) is 20% higher than Option A.
In the second set of options, when certainty was removed from C and D (both had a 20-25% chance of winning), 58% of participants chose Option D, the lower-probability but higher-expected-value option.
Kahneman and Tversky called this the certainty effect: we systematically overweight outcomes that feel guaranteed, and underweight outcomes that are merely probable, even when the probable option is objectively worth more.
The cost of certainty effect
Not all risks are equal. Some opportunities carry a small, defined downside and a large, variable upside, which investors call an asymmetric risk/reward ratio. The potential loss is capped. The potential gain is not.
These are structurally the best bets available to a founder. And they are exactly the ones the certainty effect causes us to walk away from.
The reason is straightforward: asymmetric opportunities are inherently probabilistic. The upside is never guaranteed, and that is the point. But because the brain overweights certainty and penalizes anything that merely might pay off, it discounts the opportunity below its actual value.
We encounter these situations regularly and pass them on: a partnership with unclear revenue implications but real distribution potential; an early-stage investment bet on a technology that is not yet proven; or access to a deal with no obligation to participate but meaningful optionality if it performs.
When we’re in business for years, the certainty effect makes us prioritize certainty and safe options in our operations.
So we apply the same cognitive pattern to run the business outside its operational tasks: we don’t enter the new market, we don’t sign the strategic partnership, we don't make that investment.
We tell ourselves we'd better play our cards safely, because the machinery of running a company rewards bounded, predictable decisions over probabilistic ones.
That’s when our growth plateaus.
And that was exactly what happened to our company: the minute we fell into this cognitive bias and stopped stepping outside of our comfort zone, we became stuck at the same revenue and team size for years.
The uncertainty of the upside triggers the certainty effect, and our brain discounts the possible outcome relative to the certain non-outcome of doing nothing. The calculation is not "what is the expected value of this opportunity", but "this outcome is not guaranteed; therefore, it feels less valuable than it is."
Sometimes, all it takes is to deepen our understanding of cognitive biases and remind ourselves that being adventurous and a risk-taker is what got us here as entrepreneurs in the first place.
How to avoid falling into the certainty effect
We make decisions in cognitive biases all the time; to avoid them, we need to shape the decision architecture around them.
1. Separate evaluation from commitment
Oftentimes, when we evaluate an opportunity, it feels like we’re already committing to it. But the moment we separate the two, the weight of the emotional uncertainty decreases.
Always recognize that optionality is not uncertainty.
2. Make the cost of passing explicit.
We do not naturally calculate the expected value of inaction. The opportunity cost of a deal that was passed on is invisible.
Making it visible, even approximately. What is a realistic return if this performs? How does that compare to the cost of the capital sitting idle?
3. Notice where in your business is affected by the certainty effect.
Founders routinely make probabilistic bets inside the company, on features that might not be loved or on markets that are not yet proven. That’s when we operate under expected-value reasoning, rather than falling into the certainty effect.
We are not used to distinguishing between types of decisions; it applies the same heuristics to a product bet and a capital allocation decision.
The trick is to recognize our own decision inconsistency and correct it to capture value that others leave behind.
Key takeaways
The certainty effect leads us to choose lower-expected-value options simply because they feel guaranteed, even when the probable option is objectively worth more.
When evaluating an opportunity, separate the evaluation from the commitment; looking at a deal is not the same as taking it, and recognizing that distinction alone reduces the emotional weight of uncertainty.
Price the cost of inaction. The opportunity cost of passing on something never arrives as an invoice, so make it visible financially: what is a realistic return if this performs, and what would the cost of keeping the capital idle be?
How's the depth of today's edition?
As always, hit reply if something in here hits home.
Until next week,
Lavena
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