Entrepreneurs are proud of their appetites for risk. But how much is enough?
From the moment you launch a business, you're greeted by a chorus of negativity. It's too risky, say your peers. We won't lend you a dime unless you guarantee it, says your bank. What are you thinking? asks your inner voice: You've got a family, a mortgage, responsibilities.
Clearly, an entrepreneur needs a healthy appetite for risk and a hearty helping of self-confidence to overcome all that. But how much is enough? Is there a point at which confidence and risk tolerance become liabilities? And though it's common to conflate the two (after all, you need confidence to take risks), do they really go hand in hand?
The more entrepreneurs I meet, the more I puzzle over the extent to which our internal psychodynamics drive our success--or lack thereof. That's why I was fascinated to come across a recent study, conducted by the Cranfield School of Management in the U.K., that examined 50 entrepreneurs to assess their willingness to take risks and their varying levels of confidence.
To measure self-confidence and risk tolerance, researchers asked entrepreneurs a series of questions in fields that were outside their areas of expertise. When answering, the subjects were asked to rate how confident they were that their responses were correct. Based on those responses, respondents were ranked in terms of "excessive judgmental confidence." Researchers then compared the risk-confidence measurements with the performance of the entrepreneurs' companies.
Here's what they found: The best combination of all, the one that corresponded with the strongest sales and profit growth, was a maximum of risk tolerance and a minimum of confidence. The second strongest combination, which led to slower sales but higher profits, was lower tolerance for risk and less confidence. That makes sense, as more conservative managers don't drive the top line but know how to keep profits healthy. Next in line came those with both a love of risk and high levels of self-confidence. These leaders drove sales but not profits. Finally, the worst-case combination was a low risk tolerance coupled with lots of confidence, which corresponded with weak sales and poor profits.
The Cranfield framework goes a long way toward explaining why some individuals succeed while others fail. The collision of over-confidence and risk tolerance can be deadly, resulting in errors like overexpanding, failing to read marketplace clues, misjudging the strength of competitors, and failing to pursue one initiative to its conclusion before the next is launched. And this goes far beyond the study of entrepreneurs. Could part of our problem in Iraq be that the Bush administration has both a large appetite for risk and boundless self-confidence?
The question is what to do with this insight. As a first step, how about some introspection? Where do you fall on the riskiness-confidence matrix? I'm probably in the middle of the range on risk-taking and too high on the confidence side. I'd like to change, but changing is not easy. My friend Helen Fisher, a biological anthropologist at Rutgers, believes that many personality characteristics are influenced by the levels in the brain of neurotransmitters such as dopamine. "Risk-taking is based in chemistry," she says. "Moreover, baseline levels of the chemicals involved are inherited. Hence, some people are naturally more risk-taking than others."
But chemistry doesn't have to be destiny. Just as we make difficult changes in our personal lives, we also can look into ourselves and modulate our business behaviors if we're more aware of them. What it comes down to is that no matter what industry you're in, you're also in the chemical business.
Adam Hanft is founder and CEO of Hanft Unlimited, a Manhattan-based consulting, advertising, and publishing firm.