Investors have a base tendency to violate a core decision theory principle known as Independence of Irrelevant Alternatives (IIA).

The principle is simple: if you prefer the $50 desk chair to a $100 one based on comfort, seeing a luxury chair on sale for $200 (down from $500) shouldn't suddenly make the $100 chair feel like "almost luxury" and change your original preference. Your relative preference between the original options should remain stable.

Let's examine a software investment scenario:

• Company A: $8M ARR, growing 3x, burning $750K/month
• Company B: $12M ARR, growing 3x, burning $1M/month

An investor determined B is the superior investment based on market position and team. Then they see:

• Company C in a different software market: $3M ARR, growing 4x, burning $300K/month

Suddenly, the investor might start questioning their framework. "Look how capital efficient C is! Maybe we should reconsider our assumptions around capital efficiency... A is a better business than B."

This is an IIA violation. If B was better than A, introducing C shouldn't change that relative ranking. They shouldn't let an irrelevant alternative with a dramatically different risk profile contaminate an assessment of businesses that were being compared on different criteria.

Let's examine a pricing scenario:

• An investor is comparing two data infrastructure companies:
  • Company X: $10M ARR, 80% growth
  • Company Y: $8M ARR, 80% growth. Just raised at 15x ARR.
• They're confident on investing in X. Then a generative AI infra company prices at 50x
• Suddenly X's multiple "feels too cheap" and they anchor to the new price, offering a higher multiple than relevant.

These violations lead to two shapes of strategic errors:

1) Missing strong companies in markets with different growth profiles. Not every great business needs to grow the same - sometimes slower growth with superior stickiness is the right position.

2) Systematic mis-pricing of opportunities. Using irrelevant pricing benchmarks leads to passing on attractively priced companies in different segments, or improperly pricing deals.

When you violate IIA in venture, you're usually revealing that you didn't have a clear investment criteria, and instead pattern matched over first-principles evaluating.

Note: many investors do in fact maintain excellent decision discipline