The Hidden Risk of Optimism
Many entrepreneurs have an unexpected weakness:
Optimism.
According to Daniel Kahneman, winner of the Nobel Prize in Economics, the chances that a small business will survive for five years in the United States is 35%. And yet, 81% of entrepreneurs put their personal odds of success at 7 out of 10 or higher.
The math simply doesn’t add up.
I work with entrepreneurs every day in my day job, and am in the process of starting my own company. As a result, these statistics are scary, but what's even more fascinating is Kahneman's analysis of why we misjudge our chances of success.
To summarize his argument:
We focus on our goal, anchor on our plan, and ignore the base rate of success.
We fixate on what we want to do and can do, and neglect the plans and skills of others.
We are prone to an illusion of control, and overlook the role of luck.
So, how can an experienced entrepreneur (or beginner like me) avoid these mental traps?
To be honest, I don’t know.
But, I do know that great entrepreneurs embrace the risk. When he asked his parents for an investment to help start Amazon, Jeff Bezos told them there was a 70 percent chance they could lose it all. He even joked that "I still want to come home for Thanksgiving if this doesn’t work out." (Source)
Another piece of good news is that we're often better at recovering from setbacks than we anticipate we will be. In his Ted Talk, Kahneman's colleague, Dan Gilbert, explains that human beings are equipped with:
"a psychological immune system: a system of cognitive processes, that help them change their views of the world, so that they feel better about the worlds in which they find themselves in."
According to Gilbert, winning or losing an election, getting jilted at the altar or failing at a business venture often doesn’t hurt as much as people fear it will. When predicting our future happiness, we tend to overvalue our imagined future over the future we don’t expect.
I find this perspective freeing. If the failure of my business won't hurt as much as I believe it will, why not roll the dice?
-Evelyn