Although entrepreneurs are often admired, we also associate them with reckless risk-taking and excessive self-confidence. But what if these very “faults” were one of the keys to the entrepreneur’s success?
Do you want to become an entrepreneur and do you have the conviction to succeed? Let’s take a look at whether you should trust this deep-seated desire and if myLIFE can help you convince those around you to support you. Of course, we don’t have a miracle recipe for predicting the success of your business. On the other hand, there may be some arguments you can use to counter the opposition from those who think that your project is irrational or reckless. Yes, there’s always a risk for entrepreneurs, but it is the very ability to persevere despite the risks that often makes a project successful.
Of course it’s important to have a good business plan and to properly consider the key elements for success. Yet we would like to stress certain cognitive biases that are the entrepreneur’s ally, provided they do not play an excessive role in decision-taking. The key message is that having a good entrepreneurial idea is one thing, having the qualities of a good entrepreneur is better.
On the one hand, you believe in your idea and are keen to compare yourself to other misunderstood entrepreneurs who were persistent and eventually triumphed. On the other, your friends and family think you are overconfident of the success of your project, unaware of some of the risks, and ignorant of some key information. How should you respond to them?
An excess of confidence and a risk-taking approach are essential to innovation and business creation.
Studies show that those who suffer from an excess of confidence and overestimate their ability to succeed are the most likely to become successful entrepreneurs. People who see risks rather than opportunities do not have what it takes to throw themselves into the adventure of setting up a business. And the overwhelming majority of such people have no desire to do so. Today there is proof that an excess of confidence and a risk-taking approach are essential to innovation and business creation. However, this doesn’t mean that they are a guarantee of success. Failure to recognise your cognitive biases is also a major cause of failure. Even so, a tiny dose of recklessness is needed to dare to give it a go and succeed.
Sometimes irrational, never stupid
myLIFE regularly warns you of the cognitive biases and emotions that may prevent you from taking the right decisions. However, today’s scientific studies indicate that being overly rational is not an advantage for a successful entrepreneur. It may even be a serious handicap.
If your friends and family take too rational an approach to your entrepreneurial way of thinking and desire to enter a niche or highly innovative area for which there is little information available, they risk focusing your attention on the risks rather than on the opportunities. Ultimately, this may not help you succeed, but instead force you to abandon your ideas. It takes courage and tenacity to take on a new and risky challenge. That’s why it is good to know that we can depend on judgemental heuristics, those mental and intuitive shortcuts that sometimes seem to unconsciously guide our actions.
Listing the cognitive biases of an entrepreneur is not enough to make them work to your advantage, you need to learn how to handle them correctly.
You must remain optimistic and be aware of the cognitive biases that influence an entrepreneur. While some are harmful, others are key to success. It all comes down to the magnitude. Listing the cognitive biases of an entrepreneur is not enough to make them work to your advantage, you need to learn how to handle them correctly. A study by Haili Zhang, Van der H. Bij and Michael Song entitled “Can cognitive biases be good for entrepreneurs?” published in 2020 suggests that an entrepreneur must find the right balance between two systems of thinking, two precise groups of cognitive biases.
One system of thinking based on the availability bias
Guided by the availability bias, a business leader will tend to take decisions based on the association of ideas that come easily and independently to mind. When doing this, the entrepreneur will tend to confuse availability with validity, which means they tend to take decisions based on a piece of the information that is available and required to make the right decision.
This bias is generally associated with an excess of confidence in the validity of our own judgements and skills. It encourages the entrepreneur to retrospectively attribute the outcome of an event to their intervention on the basis of a false causal link.
This system of thinking may appear dangerous, but it has one major advantage: it allows a business leader to take quick decisions on several fronts under pressure, without getting bogged down in too much detailed information.
Another system of thinking based on the bias of representativeness
This describes the general trend of an entrepreneur to treat a specific case as a general rule. For example, an aspiring entrepreneur will try to convince their family of the validity of their idea with references to the success stories of other misunderstood entrepreneurs who finally came good. There is an issue of representativeness in this, and a failure to understand statistics. A few examples cannot be extrapolated as proof of a general rule that means that success is guaranteed. This ignores the fact that the success stories that are overplayed in the media represent a tiny portion of the huge number of entrepreneurial stories that end badly. It is said that 80% of companies go bankrupt during their first 18 months.
The aspiring entrepreneur grossly underestimates the extent to which luck plays a role in success, and overestimates the impact of their own skills.
In this system of thinking, the illusion of control is also very active: aspiring entrepreneurs grossly underestimates the extent to which luck plays a role in success, and overestimates the impact of their own skills.
These biases seem harmful when laid bare like this. However, studies have shown that they are essential if you are to take the leap and set up your business, and also if you are to be a successful entrepreneur and keep your business going over the long-term.
Biases that are useful as a buffer for emotional surprises
Of course, we’re not suggesting that these two systems of thinking are absolute positives, nor are we attempting to suggest that they are valid in a different environment. They are beneficial for a business leader, because starting up your own business is an adventure that will entail a great deal of risk and uncertainty, serious time constraints and some very emotional times. It won’t all be plain sailing. It doesn’t make sense to always rationalise each and every step. Sometimes you just have to just take the plunge.
If they are to make it to the end of the rollercoaster ride, entrepreneurs must build a character and a mindset that is resistant to stress, anchors their conviction and maintains an optimistic outlook. In this respect, these cognitive biases are rather useful. After all, we inherited them from our cavemen ancestors, for whom they were crucial to survival. But be careful, we mustn’t forget that the key to success lies in the right mix of ingredients.
Entrepreneurs shouldn’t jettison all the daring elements of their nature, but they also shouldn’t hand the reins over entirely to their gut instinct, as this may end up being dangerous for their business. You certainly need nerves of steel and courage to deal with an uncertain future, but entrepreneurs can also benefits from testing their convictions with facts and statistical or mathematical realities, such as the business failure rate in the first 18 months or their own ability to bear any potential financial consequences.
The key is therefore to surround yourself with people you can rely on for impartial advice, who will help you remain clear-headed and make progress, but you must not let these opinions dampen your desire to move forward even if some decisions are risky.
myLIFE wishes you every success in your adventure as an entrepreneur.