UNITED KINGDOM — In business, it pays to curb your enthusiasm. A study by researchers in the United Kingdom found that business owners who enter new ventures with great optimism earned about 30% less than entrepreneurs who are more wary of lofty expectations.
The study’s authors say their findings may shed some light into why only half of new businesses in the UK survive their first five years.
For the study, researchers tracked individuals moving from paid employment to starting their own businesses. Their results show that that overly-optimistic entrepreneurs are frequently setting up ventures that actually have little realistic chance of being successful. In the end, it appears the optimists simply overestimate their chances of success and underestimate their probability of failure. This train of thought also leads to underestimating challenges and roadblocks that will affect business owner’s bottom line.
“Our results suggest that too many people are starting business ventures, at least as far as personal returns are concerned. As a society we celebrate optimism and entrepreneurial thinking but when the two combine it pays to take a reality check,” explains Dr. Chris Dawson, lead author and associate professor of Business Economics at the University of Bath’s School of Management, in a statement.
Dawson points to television programming such as ABC’s “Shark Tank” or the BBC equivalent, “Dragon’s Den,” which demonstrates how founders and investors are often mired in too much wishful thinking.
“Pessimism may not generally be seen as a desirable trait but it does protect people from taking on poor entrepreneurial projects,” says Dawson, who also worked on the study with researchers from the London School of Economics and Political Science and Cardiff University.
Data for the study was pulled from 18 years’ worth of data from the British Household Panel Survey, a major longitudinal study.
The study was published in the journal European Economic Review.