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Why Being Too Optimistic is Bad For Your Business

Stay positive. It’s common advice given to people who are starting a new business. Given that almost half of all new businesses fail in the first five years, it is essential that the entrepreneur stays optimistic. Generally speaking, being a positive-thinker is known to help leaders in ensuring the smooth functioning of their company and business.

New research, however, suggests that looking on the bright side too far is bad for the health of the business. The study showed that entrepreneurs who are more optimistic than average actually earn 30 percent less than their more pessimistic peers.

The logic

The study, which was conducted by researchers at the UK’s University of Bath, the London School of Economics and Political Science, and Cardiff University, and published in European Economic Review, tracked individuals as they moved from paid employment to setting up their own business venture and combed through 18 years of data on household wealth in the UK. They found that over-optimistic folks are more likely to start ill-conceived businesses that are doomed to failure from the start.

“Our results suggest that too many people are starting business ventures, at least as far as personal returns are concerned. As a society, we celebrate optimism and entrepreneurial thinking, but when the two combine it pays to take a reality check,” says co-author Chris Dawson, who is the associate professor in Business Economics at the University of Bath’s School of Management.

Professor David de Meza, in the London School of Economics Department of Management, adds that governments frequently talk about the role of entrepreneurs in creating economic growth, “but there is a downside. The personal and societal fall-out of failed businesses shouldn’t be underestimated, which is exactly what optimists do. Policy makers should not encourage the wrong sort of start-up.”

The upside

Prof. Dawson says pessimism may not generally be seen as a desirable trait but it does protect people from taking on poor entrepreneurial projects.

There have been scientific studies in the past that say traditionally considered negative thoughts like pessimism and anxiety actually keeps us on our toes and wards off complacency.

In the paper “The Surprising Upsides of Worry,” published in the journal Social and Personality Psychology Compass, Kate Sweeny, a psychology professor at the University of California, Riverside, says, “Despite its negative reputation, not all worry is destructive or even futile.” It has motivational benefits, and it acts as an emotional buffer, she says.

Even in circumstances when efforts to prevent undesirable outcomes are futile, Prof. Sweeny says, “worry can motivate proactive efforts to assemble a ready-made set of responses in the case of bad news. In this instance, worrying pays off because one is actively thinking of a ‘plan B’.”

Even worrying is shown to improve memory. A study of 80 undergraduate students by Canada’s University of Waterloo, which was published in the journal Brain Sciences, found that manageable levels of anxiety actually aided people in being able to recall the details of events.

Of course, too much of anything is bad. Time to adjust your success strategy then?

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