A growing economy and low unemployment makes most people feel good about the future. But entrepreneurs and small business owners might want to exercise some caution.
Overly optimistic business owners earn 30% less than those with below-average optimism, according to research from the University of Bath, the London School of Economics and Political Science and the Cardiff University. The study, published in the European Economic Review, found that overly optimistic thinking may be one reason half of businesses in the U.K. fail in the first five years.
See: For the first time, young Americans have less optimism than those aged 55 and older
‘As a society, we celebrate optimism and entrepreneurial thinking but when the two combine it pays to take a reality check. Pessimism may not generally be seen as a desirable trait but it does protect people.’ Chris Dawson, associate professor in business economics at the University of Bath’s School of Management
Optimists also underestimate the number of other small businesses that fail, according to the researchers. The study looked at 18 years of data from the British Household Panel Survey, and tracked individuals as they went from paid employment to entrepreneurship.
When people go all-in on a business venture without pausing to think of the potential pitfalls, they tend to pursue ideas that stand no real chance of financial success, the research found. They may think they have what it takes, or that their idea is too good to fail, whereas “realists” and pessimists are likely to be more cautious, and won’t proceed with entrepreneurial ventures they deem unpromising.
This could be hard to swallow, especially considering entrepreneurs frequently enter unknown and sometimes risky territory, and could use all the good vibes they can find. “As a society, we celebrate optimism and entrepreneurial thinking but when the two combine it pays to take a reality check,” said Chris Dawson, associate professor in business economics at the University of Bath’s School of Management. “Pessimism may not generally be seen as a desirable trait but it does protect people from taking on poor entrepreneurial projects.”
Small businesses in the U.S. typically have a 50% chance of survival in their fifth year, according to Bureau of Labor Statistics data of establishments’ opening years and survival rates in the following years. Survival rates in the first few years are high — about 80% in the first year and 70% in the second year — and then begin to dwindle. By the 10th year of business, chance of survival has dropped to about 30%.
‘There is no entrepreneur that has been a soloist all the way from the very beginning until they take that success to the bank. Invariably they’ve had to work with other people. Even Steve Jobs had Woz.’ Margarita Geleske, ‘chief evangelist’ at Uncharted Learning
Part of succeeding involves believing in your product, but it also means having others believe in it too. One analysis from market research firm CBInsights found that of 101 failed startups, 42% died because there was no market for them. When considering a new business, entrepreneurs need to ask themselves if there’s a market for what they’re offering, as well as if and how much people will pay for it and which ways they’ll evolve the business over time.
Also see: Why rural Americans are far less optimistic about their financial future
So if optimism doesn’t help entrepreneurs, what does? Having resilience and knowing how to work well with others are important, despite the stereotype of entrepreneurs being solo geniuses, Margarita Geleske, “chief evangelist” at Uncharted Learning, a nonprofit that develops entrepreneurship curriculum, told MarketWatch previously. “There is no entrepreneur that has been a soloist all the way from the very beginning until they take that success to the bank,” Geleske said. “Invariably they’ve had to work with other people. Even Steve Jobs had Woz.”
Optimism does help in other areas of life. Remaining in such a state helps people coping with diseases or recovering from surgery, according to Harvard University research, and being optimistic early in life can result in healthier old age. When older people had a positive outlook they were more likely to enjoy independent living and stay healthier, according to a short-term study of 2,300 older adults. In another 30-year evaluation of 447 patients that began between 1962 and 196, optimism was linked to better physical and mental health.
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