Entrepreneurs and Salespeople: Are You Overestimating How Much Others Value Your Product?

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Minah Jung, Alice Moon, and Leif Nelson have published a new paper titled, "Overestimating the valuations and preferences of others," in the Journal of Experimental Psychology.   The scholars examine how individuals evaluate the preferences of others.  Specifically, they find that people tend to systematically overestimate how much others will value something.   Here's an excerpt from their paper: 

In social judgments, we are frequently called upon to make predictions about the evaluations of others, such as how much a friend will enjoy a recommended novel, how long a coworker will be willing to wait for useful feedback, or how much a potential buyer will be willing to offer for a used set of golf clubs. The overestimation bias has important implications on real-world economic and social decisions. Furthermore, the paradox we document suggests that someone who perfectly understands others’ enjoyment for a good may nevertheless be imperfect at setting prices, simply because they fail to recognize how people trade off enjoyment against other valuation metrics, such as willlingness-to-pay and willingness-to-wait. This suggests that social and consumer judgments may suffer not only from general overestimation but also from an additional imperfect understanding of how people weigh trade-offs. Many preferences are developed from a complex weighting of positives and negatives, the balance of which produces a summary evaluation for each individual. When judging the preferences of others, however, that complexity may be ignored and the weight of some attributes will seemingly tip the scales in the direction of a simpler, more intense preference.

This research has important implications for entrepreneurs who are trying to determine whether their idea will gain traction in the market.   Are they systematically overvaluing their idea, or overestimating how much people will be willing to pay for the product or service?   We all know that entrepreneurs can fall in love with their own idea, but this research gives us a deeper understanding of precisely why we can't estimate willingness-to-pay properly and accurately.   The same bias, of course, affects salespeople in a wide variety of professions.  Do they really understand the potential buyers' preferences?  Can they accurately assess value from the buyers' perspective?