Optimists ‘more likely to set up business and fail’

OPTIMISTIC thinking is leading people to set up businesses that have no realistic prospect of financial success, a new study suggests.

The findings may help explain why only 50% of businesses in the UK survive their first five years.

Tracking individuals as they move from paid employment to setting up their own business venture, the study found business owners with above average optimism earned some 30% less than those with below average optimism. The authors of the study suggest many of the optimists would have been well advised to remain in employed work.

The research from the University of Bath, the London School of Economics and Cardiff University explores the financial consequences of becoming an entrepreneur for optimists. The study analysed 18 years of data from the British Household Panel Survey - a major longitudinal study - recording optimism as a bias in forecasting personal financial outcomes when subjects are still in paid employment, and its subsequent effects on entrepreneurial returns.

The authors suggest optimists tend to overestimate their chances of doing well and underestimate their probability of failure. DESPITE entrepreneurs earning on average less, working longer hours and bearing more risk than their counterparts in paid employment, optimists are more likely than most to mistakenly think they have found a good business opportunity and they have what it takes to exploit it successfully.

Realists and pessimists are less likely to proceed with unpromising entrepreneurial ventures, the authors suggest.

Past studies have reported about 80% of the population have an overly optimistic outlook. This can increase ambition and persistence, encourage others to cooperate, and generally enhance performance. Ominously though, basing choices on faulty assessments also leads to participation in activities doomed to fail.

According to the Office of National Statistics in 2016, 414,000 businesses were set up in the UK, against 328,000 business failures in the same year. DR Chris Dawson, from the University of Bath’s school of management, said: “Our results suggest that too many people are starting business ventures.”