Why mixing optimism with entrepreneurship can be dangerous for startups
The downside of optimism
Allowing for earnings while an employee, we find that business owners with above average optimism earn some 30% less than those with below average optimism – suggesting they would have been better off if they had made the prudent choice of remaining an employee.
Marriage is in some ways like starting a business. As a further test of whether optimism leads to rash decisions, we found that optimists are more likely to divorce.
Overall, our results suggest that many entrepreneurial decisions can be viewed as mistakes, based upon an excessive belief in the probability of doing well. Too many people are starting business ventures, at least as far as private returns are concerned.
It seems likely that optimism is partly responsible for the sizable churn of business births and deaths that happen year on year around the world. Governments should therefore be cautious in adopting policies that encourage startups – it seems people need little encouragement as it is.
And while it is true that new businesses create new jobs, it should also be noted that when startups fail, they are responsible for a great deal of job destruction and heartache.
This article is republished fromThe ConversationbyChris Dawson, Senior Lecturer (Associate Professor) in Business Economics,University of BathandDavid de Meza, ,London School of Economics and Political Scienceunder a Creative Commons license. Read theoriginal article.
Story byThe Conversation
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