Events

Prof. Daniel Elfenbein
Professor of Organization and Strategy
Olin Business School
Washington University in St. Louis

Research on the governance of new ventures has traditionally focused on mitigating incentive misalignment between founders and investors through boards’ incentive design, monitoring, and control rights. We identify a distinct governance problem: managing cognitive misalignment—systematic differences in beliefs about an opportunity’s underlying value. Cognitive misalignment arises from the inherent challenges of learning under uncertainty. As founders and boards gather information, their assessments of an opportunity’s merits may diverge because they interpret evidence differently and bring distinct biases to learning and decision making. We examine how boards address this challenge through cognitive governance, defined as how boards allocate their limited attention between independently evaluating the opportunity and learning about the founder’s confidence bias, and how this allocation shapes how boards interpret founder input when exercising decision rights. We use a computational model of founder–board interaction to explore when investors are better served by focusing more attention on understanding founders than independently evaluating opportunities, how optimal governance depends on the prevalence of overconfidence in the founder population, and why boards create more value when working with moderately overconfident founders. The results yield testable predictions for board composition, investor-founder matching, and portfolio construction.