Entrepreneurs Don’t Have an Optimism Bias — You Have a Pessimism Bias
February 14, 2014 Editor 0
It comes as no surprise that entrepreneurs are an optimistic bunch. Research has confirmed as much, suggesting that entrepreneurs suffer from an “optimism bias,” one that is linked to both advantages and disadvantages. Optimism can help entrepreneurs persist in the face of a challenge, but it can also lead them to take imprudent risks.
But what if entrepreneurial optimism isn’t a bias at all — what if entrepreneurs simply hold more accurate beliefs about the world, and it’s the rest of us who suffer from a pessimism bias? That’s the contention of a recent working paper from Lund University in Sweden, which sought to measure optimism not in the context of entrepreneurs’ own businesses, but of the economy in general.
The researchers drew on survey data from 1996 to 2009 asking Swedish citizens whether the Swedish economy had improved from 12 months prior, as well as whether they believed it would improve in the 12 months ahead. Not surprisingly, entrepreneurs — defined as those self-employed — were more optimistic in both cases, and this relationship held even once gender, age, education, and income were accounted for.
To examine whether this amounted to an actual bias, the researchers then compared these answers to changes in GDP to assess the accuracy of respondents’ beliefs. “Entrepreneurs make smaller forecast errors than non-entrepreneurs,” the authors write, a finding that once again held when gender, age, education, and income were taken into account.
The takeaway, the authors write, is this:
In simple terms, our results suggest that entrepreneurs view the future as bright—but they are actually right. Our evidence thereby challenges the prevailing argument that entrepreneurs are irrational in how they form their beliefs about the future. Rather, it is non-entrepreneurs who are more irrational, because their beliefs are overly pessimistic.
It’s worth noting that GDP is only one measure of economic improvement, and so an increase doesn’t necessarily mean that someone who predicted conditions worsening is wrong. (One need only look to diverging GDP and wage data to grasp this point.) Yet, the researchers use two less ambiguous survey questions to verify their findings. Asked whether inflation and unemployment would be higher or lower in a year, entrepreneurs were once again more optimistic than others, and once again as a group made more accurate forecasts. In these cases, however, the effects were far more muted when education and income were taken into account.
Perhaps the biggest contribution of this research is the simple reminder that just because someone is optimistic, that doesn’t mean they’re wrong. Though pessimists tend to claim the mantle of “realism” to justify their beliefs, in some cases it’s actually the optimists who deserve the title. There remains evidence that entrepreneurs are unrealistically optimistic when it comes to the fate of their own businesses, but in terms of the economy, their optimism has historically been justified.
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