Most of us think we are prudent in how we make decisions. We weigh our options and make the best possible choice in any given situation. But the cognitive reality is that people constantly underestimate the likelihood of something bad happening to them and overestimate the chances of positive events. This belief that things will be better in the future is known as optimism bias. Being overly optimistic can lead you to miss an important health check up or make bad financial decisions. There are also larger societal implications.
Recent research by Professor Chris Dawson from UK’s University of Bath, published in the Strategic Entrepreneurship Journal, points to the significant effect optimism bias has on the labor market.
The study shows how financial optimism bias is both a necessity and the Achilles’s heel of entrepreneurship. Starting your own business is a very forward-looking action but you open yourself up to much uncertainty. And studies have shown that optimism is highest at such moments, especially as the fate of the business is in your hands. Notably, research asserts that optimists are more likely to be attracted to activities that inspire more optimism.
This article is part of The Hope and Optimism initiative. Explore the theoretical, empirical, and practical dimensions of hope, optimism, and related states: — How Optimistic Are You? It Probably Depends on Your Age
While being your own boss tends to cause greater job satisfaction, there’s a downside. For one, according to studies cited by Dr. Dawson, most entrepreneurs don’t do well—a few are, statistically speaking, very successful. And with the amount of money people invest in their businesses (70% on average), the return on investment is the same as if they invested in stocks that tracked the market. Too many people go…