Optimistic thinking leads people to set up companies that don't have a realistic prospect of financial success, new research shows. By tracking people as they transition from paid work to starting their own business, the study found that entrepreneurs with above-average optimism earned about 30 percent less than those with below-average optimism. Many of the optimists would have done well to remain an employee.
The study examines the financial implications of becoming an entrepreneur for optimists – people with a tendency to overestimate their chances of doing good and underestimate their chances of failure.
Despite the fact that, on average, entrepreneurs earn less, work longer and are more at risk than their paid counterparts, optimists are more likely than most to mistakenly believe that they have found a good business opportunity and that they have what it takes to exploit it successfully. Realists and pessimists are less likely to continue with unpromising ventures.
Studies consistently report that about 80 percent of the population has an over-optimistic outlook. This can increase ambition and perseverance, encourage others to collaborate, and generally improve performance. But ominously, basing choices on misjudgments also leads to participation in activities that are doomed to failure.
