What is Overconfidence Bias in Entrepreneurship?
Entrepreneurship is a challenging journey. As an entrepreneur, you need to be confident in your knowledge, skills, and abilities. Confidence allows entrepreneurs to step outside of traditional corporate America, start a company, and take risks that result in massive action. In fact, as an entrepreneur, you have to make decisions with limited time, resources, or people to ask questions. But, you must be aware of overconfidence.
Overconfident entrepreneurs increase their risk of failure. “Overconfidence is overestimation of one’s accuracy, or, alternatively, an overestimation of ability relative to others, and links with increased failure risk of firms (Hayward et al., 2006).”
Simply put, you believe you are more likely to be correct than you actually are. You don’t try to improve your understanding of a challenge, risk, or assumption. You don’t crosscheck perceived “facts” or seek alternative perspectives.
How Does Overconfidence Impact an Entrepreneur?
When you are overconfident, you use hindsight to reinforce your decisions. You look back at previous successful results and automatically assume a positive outcome without considering the full spectrum of possibilities. You overestimate your talent and underestimate the risks. Your mind forms an answer that seems right and you take action without all of the facts.
The problem with this mindset, you eliminate any notion of activities that were out of your control, but positively impacted the previous outcome.
What if your previous decision was successful due to luck? Maybe, the stars aligned and you correctly guessed the timing of the market. In hindsight, your mind turns that “guess” into a fact. The worst part, you won’t even know it’s happening. Hindsight coupled with overconfidence is a dangerous activity.
Research shows that overconfident entrepreneurs tend to ignore the strengths of their direct competitors (Moore & Cain, 2007). Next thing you know, your competitor disrupts the market and steals your customers. These entrepreneurs introduce a high-risk product. Then, they are surprised when that product fails. They rely heavily on their knowledge instead of asking for advice, help, or resources from others (Hayward et al., 2006). Or, they seek out the high-familiar option while neglecting any other option (Winston Sieck, Ed Merkle, & Trish Van Zandt). Any of these mistakes can be fatal to your business.
How to Reduce the Risks of Overconfidence
Self-awareness is the first step to reducing the risk of overconfidence. Reading this article and thinking through your decision-making process is a positive action. You need to set up counterbalancing or self-regulatory mechanisms (Hmieleski & Baron, 2008). Guess what, you don’t have all the answers. Welcome to the club, neither do I! Check yourself.
1) Take some time to seek out alternative perspectives
Assign one or two people from your team to be the skeptic or devil's advocate. During a short discussion, have them sell or present other options. If you don’t have a team, how long does it take to phone a mentor? Consider finding an experienced mentor that understands your business. Develop a network of diverse advisors, people outside your area of expertise, market, or niche. Example: I’m a Success Coach for Entrepreneurs. Some of my best advisors don’t know anything about Entrepreneurship, Coaching, or Business. They ask questions that completely challenge my assumptions out of pure curiosity. They have the best BS meter and aren’t afraid to call me out. Hire a coach to bounce ideas off.
How much longer will seeking alternative perspectives take? Maybe, you’ll need one-hour tops. I’m willing to bet you can wait an hour, especially when it’s a high-risk decision.
2) Consider conducting a more research
Seriously, I shouldn’t have to tell you this. You can find anything on the Internet. You’ll discover a ton of information on blogs, in downloadable white papers, and on your competitor’s websites. It is crazy how much information I find conducting competitive intelligence. As long as it’s public information, you are good to go.
3) Reach out to experts
You might have to reach out to a few people, but I’m sure you’ll find experts happy to share their knowledge with you. For my business, I interview experts all the time. Some experts will ask for you to pay for their time, while others will speak with you for free. Either way, let’s say the right answer will generate or save you $10,000. If you pay eight experts $200 for an hour of their time was the $1600 worth it? You have opinions and advice from eight experts!
4) Hire based on diversity of thought
Teach your employees the skills they need. Don’t build a culture of “Yes” people. Encourage alternative perspectives and challenge the status quo. But, find a balance. You’re the leader, when you make a decision your employees will work together, act fast, and execute at the highest level.
Keep your high level of confidence. Go out there and build the company of your dreams. Increase your self-awareness around overconfidence. Use the techniques above to create a simple process to keep yourself and/or your team in check. I’ll leave you with this quote:
"If I should really WANT to answer the foolish question you have just asked, or any of the other questions you have been asking me, let me remind you that I have a row of electric push-buttons on my desk, and by pushing the right button, I can summon to my aid men who can answer ANY question I desire to ask concerning the business to which I am devoting most of my efforts. Now, will you kindly tell me, WHY I should clutter up my mind with general knowledge, for the purpose of being able to answer questions, when I have men around me who can supply any knowledge I require?" – Henry Ford
I hope you found this information useful. If you have any questions or comments, please let me know.
Learn more: Entrepreneurship Coaching