Overconfidence can Lead Entrepreneurs to Succeed…or Fail
What personality traits separate successful entrepreneurs from the unsuccessful? Previous research misattributed entrepreneurial mistakes to individual behavioral bias like overconfidence. Thinking that there is more behind an entrepreneur’s decisions and actions, a group of researchers created a computational model to interpret decision-making, learning and experiences that lead entrepreneurs to get into or out of the startup business.
“Often, we make an assumption that bias is bad,” says Daniel Elfenbein, co-author of this research paper and associate professor of strategy in the Olin Business School at Washington University in St. Louis. “This is a process study. It helps us to better understand confidence and overconfidence in the context of entrepreneurship.”
And, overconfidence combined with other traits can either help set an entrepreneur up for success or failure. Surprisingly, one of the most beneficial combination is made up of two “toxic” behavioral biases. The combination of overconfidence and an overreaction to information gathered produced near-optimal results for a successful entrepreneur.
“My view is that most people do tend to overreact to the latest news,” says Elfenbein. “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.”
Being overconfident in a number of aspects could be detrimental to success, though.
“These are the people who are both overly optimistic about their chances and learn too slowly, because they are over-precise in their beliefs,” says Elfenbein. “Not only are they overconfident about their prospects for profitability, but they are overconfident about what they know.”
There are some combinations of biases that have similar results as others.
“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,” Elfenbein explains. “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.”
Although some thought about success and failure can’t hurt.
“There are a lot of entrepreneurs in that space, ‘We haven’t succeeded yet,’ and they need to think about these sets of issues. There are other people in the space who say, ‘We haven’t really started to try yet, but when we start to try, how will we know what success looks like and what failure looks like?’ Our view is, they’ll probably be better business people for it,” Elfenbein says. “Part of that is behind the entrepreneurial mantra, ‘Fail fast, fall often.’”
The study appears in Organization Science.
Lisa Cunningham
Lisa Cunningham is a freelance writer and social media consultant. She holds a master’s degree in professional writing with a focus on web content development from Chatham University and a bachelor’s degree in English writing and communication from the University of Pittsburgh.
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