Of the many psychological qualities we possess or try to cultivate, optimism is among the most useful. Optimistic people have a positive outlook about the future, for themselves and for the world as a whole. And it pays off. As I have written before, optimism contributes to good health and helps us recover from health setbacks, especially as we grow older. It helps us deal with problems more effectively by focusing on the solution rather than ruminating about the problem. And when tempered with a deliberate present focus, it helps us make better long-term financial decisions for ourselves
One area of professional life in which these properties of optimism are particularly useful is in entrepreneurial activity. Many economists have argued that the entrepreneurial drive to create new businesses, and the support available to entrepreneurs in the form of an entrepreneurial ecosystem, are the key reasons why America has remained economically powerful for so long when compared to other countries.
In this post, I want to explore what psychological research has to say about the relation between optimism and entrepreneurship.
Entrepreneurship involves systematically and continuously taking on risk. Their chances of succeeding, especially over the longer term, are depressingly small. While statistics about entrepreneurial success vary, they are all consistent in pointing out how hard it is to succeed. One study reported that half of all startups fail in the first four years, while another reported that in the US, 96% of all businesses fail within ten years. This is why entrepreneurs tend to be drastically different in their outlooks compared to similarly skilled people who work in a salaried job in one important way: they tend to be over-optimistic about their chances. In one study, one third (33%) of venture founders were absolutely convinced that their venture had a zero chance of failure, and 81% believed their venture had a 70% or greater probability of surviving. Another large-scale survey found that entrepreneurs are more dispositionally optimistic and care more about non-monetary rewards than wage-earners.
Based on the fact that optimists self-select into becoming entrepreneurs, here are four ways in which optimism helps entrepreneurs succeed in their ventures.
“The ambiguous nature of the future allowed optimists to distance themselves from negative constraints and approach positive outcomes, creating vivid colorful images in their mind.“
Thinking in this way about the future is a good thing if you are an entrepreneur. Research shows that when people are future-oriented (as optimists tend to be) and when they think vividly about distant futures in a positive way (How will the world be like ten years from now? or twenty years from now?), it stimulates all kinds of creative ideas about what such a world will contain, and how we can get there. For entrepreneurs, such a thought process will lead to novel ideas for new products, services, or businesses having a greater chance of success.
Entrepreneurs are faced with hard choices virtually every day. Under such circumstances, rather than just waiting to act and wavering on which course of action to take, optimists plunge right ahead. Why this is the case is not hard to understand. The future looks rosy for optimists, and something they want to get to, and make happen. For entrepreneurs, the pronounced tendency to act usually means being decisive in choosing a particular course of action and then just performing it. Such an approach is likely to be effective in doing what is needed to get the business venture going and to keep it running.
When undertaking difficult activities or confronting something that is a personal challenge (starting and operating a business venture certainly counts as both), optimists, not surprisingly, are more confident and persistent. Even when they feel like they are not making much progress, they stick to their chosen path. What is more, such persistence is maintained even in the face of discouraging results. In one neat study, social psychologists Cade Massey, Joseph Simmons and David Armor found that NFL fans continued to be optimistic about their preferred team throughout the season even when they had information to the contrary, and given incentives to be accurate. They argued that such optimism of people has a motivational basis.
As we have seen at the outset, launching a successful new business is very difficult. Even the most competent and lucky entrepreneur will encounter failure at one time or another. What happens after that? As one paper pointed out:
"Exploratory and inventive organizational activities … involve high base rates of failure and they call for highly resilient actors who must valiantly persevere for eventual success.”
Optimistic entrepreneurs are resilient in two significant ways. First, they are emotionally more resilient. Where failure normally produces ruminative thoughts about how and why it happened, and what could have been done to avoid it, optimists don’t fall into this trap. Instead, they focus on the task of moving on and starting their next venture. The second type of resilience is cognitive. Thinking positively encourages optimistic people to think more broadly which in turn allows them to be flexible and open to new ideas. They can move on more quickly and to better quality ideas. Pessimists, on the other hand, tend to be narrow-focused in their thinking. While this may be helpful under some circumstances, it will hold you back if you are trying to bounce back from a business failure.
There is some emerging evidence that optimism may be linked to financial success of entrepreneurs. In one longitudinal study conducted by economists in Riga, Latvia, the researchers found that entrepreneurs’ optimism was associated with a greater increase in their company’s profits a year later. Another study argued that “the relationship between optimism and new venture performance may be positive up to moderate levels of optimism” but also found that at excessive levels of optimism, the relationship was negative. From these findings, one thing is clear: If you are entrepreneur, being optimistic (but not excessively so) provides motivation, emotional fortitude, and cognitive resilience.