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.
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.”
Entrepreneurial outlook
The research took into account the learning entrepreneurs bring to the table as well as the knowledge they gain through their experience in the startup world. The authors believe this initial mindset helps to explain how entrepreneurs react to success and failure, and indeed how they react the various behavioral biases.
They reveal that the worst entrepreneurs tend to be those who are excessively optimistic and who also learn slowly. This overconfidence manifests itself not only in terms of their chances of success, but also in their level of knowledge. Such blind optimists tend to carry on regardless, and often destroy large amounts of value in the process.
The best mindset seems to be one of slight overconfidence paired with the tendency to overreact to any new information one encounters.
“In our simulation, if you’re more likely to start, but quick to pull the plug, that works almost as well as if you’re perfectly calculating the odds at every point in time,” the researchers say. “Even if you react too quickly to the information that you get, those gut-feel people will do theoretically just as well as the folks who are hyper-rational about it.”
Suffice to say, the authors are realistic enough to accept that their work is perhaps more useful as an academic exercise than a guide for VC investors, but nonetheless, they hope it will be the basis for further study.
“This is a process study,” they explain. “It helps us to better understand confidence and overconfidence in the context of entrepreneurship. And it is intended to address questions that firm founders, angel investors and venture capitalists care about, including how we can focus on mitigating failures with the right approach.”
What both this and the previous study seem to have in common however is the importance of learning from new information. If anything, it seems those most attuned to do that are best placed to succeed, regardless of their level of optimism.
