Irrational Optimism: The Entrepreneur’s Blessing and Curse

An entrepreneur starting a company might work 16-hour days for years, put their savings on the line, and take on stress far beyond anything most people have ever imagined. But because he optimistically believes that there will be a big payoff for at the end, it’s all worth it.

The reality however is that about 75% of new businesses no longer exist after five years.

So what makes individuals pursue entrepreneurship — which requires unbelievable stress, hard work, and financial and career risk, while offering a highly uncertain return?

Optimism bias is a cognitive bias that causes a person to believe that they are less at risk of experiencing a negative event.

An irrationally optimistic person tends to be overconfident about their own abilities and draws very positive conclusions from limited data.

It’s a mindsets that, while not entirely grounded in reality, may nonetheless contribute to successes.

Optimism motivates people to work as hard as they possibly can and risk everything on ventures with a low probability of succeeding.

However, while irrational optimism can help entrepreneurs take action to start up and persist in the face of a challenge, it can also lead them to taking imprudent risks.

Surely you’ve read the blog posts and books about conquering fear and maximizing self-confidence as precursors for success. You’ve read so much of this in part because the value proposition of “achieve success in spite of obvious hurdles” is much more attractive than “accurately assess risks.” It’s easier to sell a seminar on how to build confidence and achieve your goals than it is to sell a seminar on how to have realistic expectations.

In reality, overly optimistic individuals may overestimate their real abilities and the probabilities of given outcomes.

When most people hear about Bitcoin they come to the conclusion that it will almost definitely not work. When optimists hear about Bitcoin they think it will change the world and that they can profit from it. It appears safer to them than to others who exhibit no irrational optimism.

The same mindset that can lead entrepreneurs to taking action and achieving huge successes despite the odds can also lead to harsh failures and disappointments.

Healthy self confidence versus irrational optimism

Taking risks without thinking first, believing with certainty that everything will go as desired, and not accepting data or using common sense can of course lead to problems.

It’s irrational and irresponsible to drive past a gas station when you’re tank is almost at empty, believing that you will somehow find a “better” gas station in the next few minutes.

A blind faith in having a positive mindset as a key to success is not healthy. However, not all optimism is irrational.

“I have encountered a couple people who have read books like “The Secret” and erroneously become irrational optimists. They start to believe that mindset is all that matters. Rational optimists believe that mindset matters, but they also recognize that reality is part of the formula. You must change reality, not just wish it away.” — Shawn Achor

Rational Optimism: A necessity to take action

Entrepreneurs view the future as bright — and sometimes they are right. It may be non-entrepreneurs who are irrational, because their beliefs are overly pessimistic. Just because you are optimistic does not mean you are insane.

Without optimism, our ancestors might never have ventured far from their tribes, conquered new lands or developed new technologies.

Given divorce rates, no one might ever get married.

If you considered how much risk you were taking with a new business or acknowledged how much work it would require, you might never make the attempt. But the energizing force of optimism inspires you to believe it will work out.

Entrepreneurship requires dealing with repeated failure. It happens many times each week. Optimism helps battle through it.

If you have no optimism, you have no reason to try. If you do not try, you cannot be successful.

By this logic however, finding that successful entrepreneurs are optimistic does not necessarily mean that to be successful you need to be optimistic. The group has self-selected. Correlation does not equal causation.

Adapting to Data

The more times you step up to bat, the greater the likelihood that you’ll hit a homerun.

But most of us aren’t wired that way. We strike out, so we change our course. Indeed, it’s a rational response. We accept the data and learn from the experience, and are no longer as optimistic about the potential. We move on to better things.

As an entrepreneur you must capture data — about your product, your marketing strategies, etc.— and make decisions. If you make the wrong decision you fail.

However, when starting up, you have almost no data. The Founders of AirBnb had no data to indicate that millions of people across the world would want to host strangers in their homes. But they tried anyways. Over time, they captured more data and learned that people do indeed want to host strangers in their homes. Now, the company is worth millions as it challenges multi-billion dollar hospitality industry incumbents.

However for every AirBnb there are dozens if not hundreds of ideas that fail to receive data indicating market demand or business viability.

Optimism is extremely beneficial in the right situations. But it must be paired with rational thinking — conscientiously checking on the results of our efforts to make sure that overly optimistic expectations are not leading us astray.

Healthy Pessimism

Optimism acts as a barrier to anxiety. It expands our perception of our ability to achieve outcomes, overpowering the doubts and worries that might otherwise paralyze us.

However, some anxiety is rational. I don’t buy-in to the idea that all fear and anxiety is irrational and should be squashed. Some sources of fear and anxiety are in fact valid and must be considered.

In addition, having expectations beyond reality inevitably leads to disappointment.

Matching expectations to reality insulates us from crushing disappointment when things don’t go our way and increases our ability to feel satisfied.

Furthermore, outright pessimism can spur us to act with expedition. There’s nothing like a looming disaster to make us get things done. When you know you have a family to feed, you’re far more motivated to make more money.

Pessimism can give us the push that we need to go the extra mile to head off potential catastrophes.

If we sugar-coat the present, we can avoid taking necessary actions.

Awareness and Strategic Optimism

How can we remain motivated — benefiting from the power of optimism — while at the same time protecting ourselves from its pitfalls? How can we balance the real with the ideal?

After understanding optimism bias I’m aware of my own irrationalities. When I hear crazy new startup ideas I think they have a higher probability of succeeding than they actually do. At times I’ve taken on more risk than was appropriate and I’ve overestimated my ability to succeed at ambitious projects.

Irrational pessimism causes paralysis. Irrational optimism causes delusion.

Thinking rationally doesn’t mean removing all risks. It means taking calculated risks.

Healthy pessimism can help motivate and prepare for the future. Rational optimism can help you maintain dedication and productivity.

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