Researchers at Bath University, London School of Economics and Cardiff University tracked the earnings of entrepreneurs from when they were employees for a company until after they started their own businesses. They found that entrepreneurs with above average optimism earned more than their pessimistic counterparts when they were employees. But when they made the jump to entrepreneurship, they earned 30 percent less than other more pessimistic business owners.
The study's authors say excessive optimism can lead to people having too much confidence in their business idea's earning potential. In addition the study found that pop culture is encouraging people to start poorly thought out businesses.
In an article in The Telegraph, the researchers say television shows like Britain's Dragon's Den (Shark Tank in the United States) tend to add to potential entrepreneurs' optimism and overconfidence in their ideas because they see wishful thinkers go on these shows with business ideas that are objectively bad and some of them still get funded.
To would-be entrepreneurs, the researchers say, seeing other people who want to own their own business make it onto these shows to pitch their ideas -- even if they are bad -- gives them the confidence that their own ideas will be sure money makers.
I know for my own business, which sells drug and general health testing kits, we see a lot of pop cultured-inspired products come across our desk. Encouraged by the numerous forensic cop shows on TV, we get a lot of "forensic tests" pitched to us because some would-be entrepreneurs seem to think there is a huge demand for forensic tests among the general population.
While pessimism might be seen as an undesirable trait, especially in entrepreneurialism, the study's researchers say, it can help make people realists and help them recognize when a business idea is not worth pursuing.
As an annoyingly optimistic person myself, I would never encourage people to be more pessimistic, however I do encourage people to be realistic when contemplating business ownership.
Here are three ways to keep your optimism in check when starting a business.
1. Expect to lose money.
As the researchers in the aforementioned study say, a lot of would-be entrepreneurs actually expect to make money in their first year in business when the reality is that they will almost certainly lose money in their first year or two before they start making a profit.
Fortunately, I was quite experienced with business before I started my own company, which meant I was under no illusion that I would be making money for a while and there was no shock for me when my businesses lost money before they really got rolling.
It's this shock at losing money that really gets a lot of new entrepreneurs down. To deal with the shock, I find that it's a good idea to put a limit on how much you're willing to lose on a business before you pull the plug. I did this with my last startup, which I still think had a good idea behind it despite it not getting off the ground. Once I had reached my "loss limit," I shut the project down to prevent anymore losses.
2. Listen to the feedback.
If people are truly in love with their business idea, they can become deaf to any negative feedback they encounter about it. We love to celebrate stories of people hearing "This will never work," and proving the naysayers wrong, but when someone tells you that your idea probably won't work, it might just be that you have a bad idea. Brushing off honest critiques all the time doesn't show that you're a go-getter who just believes in your idea. It just shows that you have blinders on.
A friend reached out to me with his business idea not long ago saying he wanted to get my feedback, but while listening to his idea for half-an-hour it became apparent that he wasn't after feedback. Every comment I tried to make was cut off so he could reiterate how amazing the idea was. I just gave up after a while since I could see my feedback wasn't being considered.
3. Think worst case scenario.
You don't have to bring yourself down, but always be thinking about what can go wrong in the worst possible way. This will allow you to be prepared for it while also remaining realistic. Regardless of how well the market is doing or how much momentum you have, always be thinking about those worst case scenarios. As a wise fortune cookie once told me: "Hope for the best, but prepare for the worst."