Written by Jeff Grabmeier, (614) 292-8457; [email protected]
ENTREPRENEURS OVERCONFIDENT, PRONE TO GENERALIZATIONS
COLUMBUS, Ohio -- Entrepreneurs think differently than corporate managers when it comes to making business decisions -- and not in ways that seem favorable at first glance.
A new study of 219 entrepreneurs and managers found that entrepreneurs were more likely to be overconfident about the correctness of their decisions and were more prone to make broad generalizations based on limited experience.
While these traits may not seem flattering, they are the attributes that make entrepreneurs successful, said Jay Barney, co-author of the study and a professor of management and human resources at Ohio State University's Max M. Fisher College of Business.
"Entrepreneurs don't have the time to go through a thorough, rational decision-making process," Barney said. "If they spend too much time deciding, their window of opportunity will pass them by."
Overconfidence may help entrepreneurs make a decision quickly, stick to it, and persuade others to be enthusiastic about the plan, he said.
And by using generalizations, entrepreneurs can cut through a bewildering mass of solutions to a problem and choose an appropriate answer quickly.
Barney conducted the study with Lowell Busenitz at the University of Houston. The results were published in a recent issue of the Journal of Business Venturing.
The study included 124 entrepreneurs who were founders of plastics, electronics and instrument manufacturers that were less than two years old. The 95 managers in the study worked for firms with more than 10,000 employees and were responsible for at least two functional areas (such as marketing, finance or personnel.)
The researchers measured overconfidence by asking the subjects five questions based on health statistics in the United States. They were asked to choose one of two answers to each question and then rate how confident they were that their answer was correct. Results showed that entrepreneurs were more likely than managers to express confidence in their answers, even when they were wrong.
In order to measure propensity to overgeneralize, the researchers asked subjects to consider two scenarios representing realistic business decisions. In each scenario, the subjects were given a problem that could be solved one of two ways: by relying on quantitative and statistical information or by relying on personal experience. These results showed that entrepreneurs were more likely to go with their personal experiences rather than with the statistical data.
Many other studies have tried and failed to find personality differences between entrepreneurs and managers, Barney said. For example, researchers have been surprised because studies show entrepreneurs aren't more willing than others to accept risk.
This study shows that the difference is not in personality traits, but in how entrepreneurs and managers think.
"It's not that entrepreneurs are more willing to take risks, it's just that they don't see the risks. If you're overconfident in your abilities and willing to generalize from small samples, you don't see the risks that are apparent to others," Barney said.
Barney said he doesn't want to imply that only entrepreneurs use non-rational methods of decision making. But entrepreneurs have especially good reasons to look for alternatives to rational decision making, given the immense and numerous problems that they face.
"If entrepreneurs realistically looked at all the problems they confronted, it would in all likelihood make the whole process seem overwhelming," Barney said.
The results of the study may also explain why entrepreneurs sometimes make bad managers. While overconfidence and a willingness to generalize may be helpful when starting a business, they can lead to major errors when trying to maintain a business, Barney said.
"It takes different skills to build a business than it does to keep it going once it matures," he said.
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