You’ve probably heard about illusory superiority – a cognitive bias that causes people to overestimate their abilities – in the context of driving. More specifically, the context you may be familiar with comes from studies that show when drivers are asked to rate their driving abilities against those of their peers, almost all respondents grade their skills as being above average. But what about entrepreneurs? It’s no secret that entrepreneurs are confident individuals, but are they guilty of illusory superiority too? If so, is this a bad thing?
Harvard Business School professor Noam Wasserman found that confidence was one of the three characteristics that were recurrently on display after studying data from 10,000 entrepreneurs (the other two being passion and representativeness). But Wasserman also found that being too confident can be dangerous. “Founders are only looking at the rosy scenarios," Wasserman warns. "They definitely tend not to look at worst-case scenarios, potential pitfalls and ways in which bumps in the road can lead to shattering the dream."
Wasserman isn’t the only one who feels this way. In their paper entitled A Hubris Theory of Entrepreneurship, students from the University of Colorado and the University of British Columbia go as far as to depict overconfidence as the Achilles’ heel of an entrepreneur and argue that overconfidence increases the likelihood of failure.
Forbes contributor Nathan Furr conducted extensive research on arrogance and the entrepreneur and concludes that too much confidence can hinder progress. “Overconfident entrepreneurs who see themselves as ‘experts’ are least likely to learn and change,” writes Furr. Furthermore, Furr interviewee, Mike Cassidy, who has founded companies worth over a billion dollars, says, “The thing that scares me most is someone who is convinced they are right, because they will never change.”
I'll just leave this Kanye West picture right here.
Some experts, however, argue that overconfidence is key to entrepreneurial success and not a weakness at all. Overconfidence can provide motivation during difficult times – where individuals with low self-confidence may throw the towel in, a self-assured entrepreneur may continue forward and eventually find success. As well, entrepreneurs who start a business with the inaccurate perception that they have the skillset required to succeed in the industry when in fact they do not can benefit from their misjudgement – just entering into that industry, they may develop the required abilities they thought they already possessed and go on to find success.
Despite there being some positives and negatives to a healthy entrepreneurial ego, most experts agree that overconfidence leads to high failure rates among startups. EMyth’s 2013 State of the Business Owner Report found that 85% of business owners believe they have a competitive advantage, yet Harvard Business School reports that 30% to 40% of startups end up liquidating all assets and up to 80% of startups never realize their projected return on investments. Overconfidence might very well be culpable for these high failure rates. After all, who doesn’t like blaming an oversized ego for someone’s own missteps?
Entrepreneurs, we want to hear from you. Have you been guilty of being a little too self-assured? If so, how did you discover it and how have you changed since? Let us know @NapkinBetaBeyond.