Most new businesses fail. Even the rosiest estimates of new business success suggest that only 50% of new businesses will still exist in five years, and only about a third will continue to exist for a decade. Given those odds, why would anyone become an entrepreneur?
In general, entrepreneurs overestimate their chance of success. They have intimate knowledge of the business they are creating, and so they believe those factors will protect them from the grim statistics.
Of course, entrepreneurs are not alone in this optimism. There are many forms of overconfidence bias in psychology. People believe that their skills at many tasks ranging from sports to math to playing a musical instrument are better than they actually are. In general, only real experts in a particular domain are well-calibrated about how good they are.
Why does this overconfidence bias persist? Intuition would suggest that we should strive to be as accurate as possible in our assessments about ourselves and our chances of success.
As it turns out, though, optimism has real benefits.
In particular, people’s motivation to pursue a goal depends on two factors. One is their belief about the importance of the goal. The other is their belief about whether they will succeed at achieving the goal.
Overconfidence makes the gap between present and future seem possible to bridge. If you have a realistic assessment of the future, you may come to believe that the goal cannot possibly be attained. Believing that the goal is achievable engages you to work on that goal.
There are two benefits to working on a goal that may actually be out of reach.
First, the motivation to pursue a goal based on overconfidence may actually spur you to work hard enough to achieve what might otherwise have been unattainable. That is, you may actually delude yourself into success.
Even if you fail at the particular goal you were striving for, it may have significant benefits for the future.
Most goals are not binary. That is, you don’t either completely succeed or completely fail. You may not reach the heights you hoped for, but you may still accomplish a lot.
Second, you will learn a lot in the process of pursuing a goal. That learning may improve your skills and make you better able to achieve a future goal than you would have been if you had given up.
Third, striving toward a goal may get your work (and your work ethic) noticed by other people. Your effort and hard work may open up future valuable opportunities.
Of course, there is also a potential downside to optimism.
Your motivation to work on any task depends on your estimate of success. Overconfidence is good when it leads you to believe that something that might be nearly impossible is actually something that you could achieve. However, overconfidence can be dangerous when it leads you to believe that you have nearly succeeded at something that actually requires a lot more effort.
Chances are you can think back to an exam you took in school that you thought you were completely prepared for up to the moment when you looked at the first question. You may have studied less hard than you could have because of your belief that you were adequately prepared.
In situations in which your confidence in an uncertain outcome leads you to coast, it may be more helpful to try the opposite delusion: "defensive pessimism." In this case, you inflate your sense of how far you have to go to achieve your goal. You use the power of anxiety to keep you working hard at an outcome that is nearly assured.
For both overconfidence and defensive pessimism, you are taking a biased view of reality. As it turns out, though, a realistic view of the future is overrated. Your chances of success in the future depend much more on your continued effort than they do on a realistic assessment of your odds of success. Anything that keeps you motivated is a benefit. Even a bit of delusion.