Richard Cantillon, the eighteenth-century economist who coined the term “entrepreneur,” defined the term as “bearer of risk.”
Yet research shows that entrepreneurs are just as risk-averse as the rest of us.
“Only when it comes to starting a business are (entrepreneurs) daring,” James Suriowecki writes at the New Yorker, and that’s “because the fundamental characteristic of entrepreneurs isn’t risk-seeking; it’s self-confidence.”
Indeed, the confidence necessary to beat the odds and sustain a new business seems to verge on delusion. The research on how entrepreneurs overestimate themselves is staggering. Here’s a digest:
- According to a 1997 study from the University of Houston, entrepreneurs are overconfident about their capacity to prevent bad things from happening to their business.
- According to the same study, entrepreneurs are overconfident about their business’s prospects.
- In a 1988 Purdue University study of 3,000 entrepreneurs, more than 80% of participants thought that their business had at least a 70% chance of success.
- In the same study, 33% of entrepreneurs thought they had a 100% chance of success.
- A 2013 study from Erasmus University Rotterdam found that entrepreneurs think they will live longer than everybody else.
Nobel Prize-winning psychologist Daniel Kahneman says that the delusion is necessary, given that a third of American small businesses flame out within the first five years and two-thirds perish within 10.
“A lot of progress in the world is driven by the delusional optimism of some people,” he said in an interview. “The people who open small businesses don’t think, ‘I’m facing these odds, but I’ll take them anyway.’ They think their business will certainly succeed.”
A realist will have a harder shot at success in the world, Kahneman says, since people tend to favour optimists. They rise quicker in organisations because they believe they can. They attract more funding for their enterprises by selling their vision. People will work harder for the optimistic leader because they want to be assured that it will all be OK. Studies of meetings show that people don’t listen to the most informed person in the room; they default to the loudest one.
That’s why we say that these people have a “can-do spirit,” Kahneman says. “Among other things, a ‘can-do spirit’ means you think you can do things you cannot do.”
And sometimes, it’s this semi-delusional thinking and a little luck that makes the seemingly impossible possible.
Business Insider Emails & Alerts
Site highlights each day to your inbox.