Entrepreneurship Equals Optimism? Behavioural Science Perspective
It is common knowledge that startups have an extremely low survival rate, and even less are able to secure funding and manage it in a meaningful way. Even though, thousands of new businesses are daily created worldwide, with great enthusiasm. Regardless of the reality, people who set off on an entrepreneurial journey want to believe it will work out. Entrepreneurs are often overly optimistic and confident about their projects – are such beliefs what keeps entrepreneurs going?
It is a simple phenomenon – in the same manner most people believe they are better than average drivers, entrepreneurs believe they have better chances to be successful in business than anyone else. Such phenomenon is called overconfidence, which is a cognitive bias. Cognitive bias is a systematic error in judgement, which comes as a result of unconscious processes as brain tries to manage, simplify and make sense of information we are exposed to.
In case of entrepreneurial overconfidence, subjective understanding of business chances is far greater than the objective probability and accuracy of those beliefs. Overconfidence is the phenomenon behind serial entrepreneurship – which more often means serial failures than serial successes. On the bright side, precisely entrepreneurial biases like overconfidence and excessive optimism are what contributes to an exciting diversity of startup ecosystems.
However, entrepreneurial overconfidence is just the tip of the iceberg, since it seems that only the overconfident ones start businesses. Fear of business failure is much more significant, which means the actual problem in the market is the lack of entrepreneurial confidence. According to Global Entrepreneurship Monitor, which annually measures different elements of the international entrepreneurial climate, recorded fear of business failure rates as high as 60% in some countries, in adult population between 18-64 years old, even though many of them confirmed to have been exposed to good business opportunities.
Consequently, the solution to discrepancies in entrepreneurial confidence is two-fold. While extreme optimism and hubris found in some entrepreneurs needs to be recalibrated, the underconfidence of potential entrepreneurs needs to be addressed as well, in order to reduce the gap between entrepreneurial overconfidence and underconfidence. A popular behavioural technique which can work for both cases is called premortem.
Premortem is a debiasing strategy which requires entrepreneurs to imagine their business scenarios were deployed exactly how they wanted and planned, but the outcome was a disaster. The next step of the exercise is to identify all the traps hidden in their current business plans which can lead to a business failure. Premortem and other simple methods can help to anticipate future outcomes, but also keep a healthy dose of entrepreneurial confidence and optimism.
This article was written by Ana Barjasic, founder of Connectology, an international boutique entrepreneurship and investment agency, with focus on access to finance, investment readiness and behavioural science. Connectology is an Official Knowledge Partner of the Annual Investment Meeting.
