Why Entrepreneurs Take the Plunge

Entrepreneurs aren't always risk-takers by nature, studies show. So why are they able to face the enormous odds against a successful startup? Because they're overconfident. Ohio State University management professor Jay Barney, Ph.D., and Lowell Busenitz, Ph.D., of the University of Houston, asked 124 entrepreneurs and 95 top managers to answer various questions and to rate how sure they were about their responses. While both groups proved overly confident, the entrepreneurs were particularly so, the researchers report in the Journal of Business Venturing.

The participants were also asked to make sample business decisions, such as whether to buy a U.S.-made machine a friend recommended or an import that data showed was superior. The entrepreneurs, it turned out, tended to generalize from their friends' experience (95 percent chose the U.S. machine), while managers preferred to go by statistics. The lesson? Overconfidence and overgeneralizing may be key components of entrepreneurial success, Barney says. "Without some unsubstantiated enthusiasm, many startup ventures would quickly die."