Recently I looked at new research suggesting that it pays for entrepreneurs to be pessimistic.  The research suggests that excessive optimism is prompting large numbers of entrepreneurs to set up businesses with little to no chance of ever succeeding.

The research suggests that excessive optimism is prompting large numbers of entrepreneurs to set up businesses with little to no chance of ever succeeding.  The study tracked individuals who moved from full-time jobs into a life of entrepreneurship, and found that those with above average optimism earned around 30% less than their peers with below average optimism, suggesting that the optimists should really have stayed in their jobs.

Such is life, a second study led by researchers from Washington University in St Louis suggests the opposite, and that optimism is actually the most desirable trait entrepreneurs can have.  Indeed, the researchers suggest that overconfidence combined with an overreaction to the information gathered tends to provide the best results.

“My view is that most people do tend to overreact to the latest news,” they explain.  “That’s what I’ve seen in my own laboratory work. It makes me actually think, if that’s the case, to be a little overconfident at the start might be a pretty good thing—at a population level. The idea that every bias is a defect may well be wrong.”

An unclear picture

To further confuse matters, a third study, from the University of Cologne, shares the findings from the original study, and suggests that overconfidence may be detrimental to the chances of a startup.  Similarly to the original study, the researchers suggest that overconfidence may be prompting entrepreneurs to view their abilities as greater than they actually are.

This often results in the entrepreneur thinking their idea is much better than it is, which results in costly investments and poor decisions, which imperil the chances of their startup.

“There is an optimistic illusion rooted in the human need to maintain, defend and promote a positive self-view, which explains why so many entrepreneurs and CEOs take overly big and risky strategic shifts that could potentially harm their business,” the researchers say.

The authors believe that one’s environment plays a big part in their confidence levels, especially among those higher up in a hierarchy, such as a CEO or a founder of the business.  They believe that progression up the ranks imbues people with higher levels of confidence, with this indeed often seen as a central part of the role.

It’s easy to imagine this also being the case for entrepreneurs, as if they’re not bullish about their own idea, it may seem impossible to convince others that the idea is a worthy one.  While there is an element of confidence needed to overcome the tribulations of startup life, it’s also vital that it doesn’t blind you to the barriers you face.

As such, it seems a degree of balance is required, with sufficient confidence to take on the risks associated with running a startup balanced with sufficient humility to know when things aren’t going well.