A Commonly Held Belief About Entrepreneurship Is Totally Wrong, Study Finds
If you want to get out of the rat race and start your own business, you’ve gotta be optimistic, because it’s tough out there. In fact, a good old fashioned glass half full outlook might not even be enough. An entrepreneur needs “delusional optimism,” according to one Inc. interview, or “irrational optimism” according to another in Entrepreneur. Well, as we probably should have expected from self-promotional bromides, these assertions might actually lead talented founders astray.
That’s because, as it turns out, the exact opposite is true, according to a new paper from researchers at the University of Bath’s School of Management in the United Kingdom, the London School of Economics, and Cardiff University. They found that, actually, when it comes to entrepreneurship, pessimism is the way to go. Their research analyzed the personal finances of businesspeople as they transitioned from being employees to running their own shop.
The results were pretty striking, with founders who tracked high for optimism earning about 30 percent less than their more pessimistic counterparts. 30 percent! New business-owners typically don’t earn very much in their first year — a survey by Payscale pegged the number between $34,392 and $75,076 — but that’s still a nice chunk of change.
Why Debbie Downers Prevail In Business
The reason that pessimism pays, explains, Dr Chris Dawson, a business economics professor at University of Bath’s School of Management, in a video interview, is that pessimists and realists are less likely to fall for dubious opportunities or have unrealistic expectations. And when it comes to starting a business, it’s pretty important to have realistic expectations.
“Most businesses fail, they perform financially poorly, they don’t create jobs, they’re not particularly innovative,” says the surprisingly sunny Dawson. “Optimists are more likely to be fooled into thinking they have found a good opportunity … and they have what it takes to exploit it successfully.”
If this sounds like you, don’t feel too bad, because most people tend to over-estimate their abilities and general propensity for rightness in the long run. There’s probably something evolutionary going on here, being stressed out and pessimistic at all times isn’t particularly healthy. An optimism bias is pretty important for simply getting through the day.
But, Dawson says, this is still a problem, because policy makers in particular tend to emphasize startups and small businesses as a way to promote job growth and innovation. As a result, a lot more people who definitely don’t have what it takes start to think to themselves, “hey, maybe I’ve got what it takes.”
Fortunately, researchers like Tali Sharot who have studied optimism bias say that there is a fix. While you don’t really want to train yourself to be more pessimistic, optimism bias is actually pretty easy to quantify. Think about how much you thought that first apartment in the big city would cost per month, versus what it actually costs no. How far were you off? 15 percent? 20 percent? Was it actually cheaper?
If your answer is the latter, you might be more cut out for a career in entrepreneurship than you think, while the other two would do well to assume everything will turn out about 15 or 20 percent worse than they think it will. Turn those non-frowns upside down, people. Your employees are counting on you.