Optimistic thinking is leading people to set up businesses that have no realistic prospect of financial success, according to new research published in the European Economic Review.
The new study’s findings may help explain why only 50 percent of businesses in the U.K. survive their first five years, according to researchers.
Tracking individuals as they move from paid employment to setting up their own business venture, the study found that business owners with above-average optimism earned about 30 percent less than those with below average optimism.
Many of the optimists would have been well advised to remain an employee, noted researchers from the University of Bath, the London School of Economics and Political Science, and Cardiff University.
Despite entrepreneurs earning on average less, working longer hours, and bearing more risk than their counterparts in paid employment, optimists are more likely than most to mistakenly think they have found a good business opportunity and that they have what it takes to exploit it successfully, according to the researchers.
Studies consistently report that about 80 percent of the population have an overly optimistic outlook. This can increase ambition and persistence, encourage others to cooperate, and generally enhance performance.
However, basing choices on faulty assessments also leads to participation in activities doomed to fail, the researchers pointed out.
In 2016, 414,000 new businesses were set up in the U.K., while 328,000 businesses failed, according to the Office of National Statistics.
“Our results suggest that too many people are starting business ventures, at least as far as personal returns are concerned,” said Dr. Chris Dawson, an associate professor in business economics at the University of Bath’s School of Management.
“As a society we celebrate optimism and entrepreneurial thinking, but when the two combine it pays to take a reality check. Every episode of the BBC’s Dragon’s Den provides examples of such wishful thinking. Pessimism may not generally be seen as a desirable trait, but it does protect people from taking on poor entrepreneurial projects.”
“Governments frequently talk about the role of entrepreneurs in creating economic growth, but there is a downside,” added Professor David de Meza of the London School of Economics Department of Management. “The personal and societal fall-out of failed businesses shouldn’t be underestimated, which is exactly what optimists do. Policymakers should not encourage the wrong sort of start-up.”
For the study, researchers analyzed 18 years of data from the British Household Panel Survey recording optimism as a bias in forecasting personal financial outcomes when subjects are still in paid employment, and its subsequent effects on entrepreneurial returns.
The study was published in European Economic Review.
Source: University of Bath