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Thinking positively has its benefits. Health-wise, studies have shown how positive thinking can decrease anxiety, strengthen the immune system, and even lead to a longer life.

But what about when it comes to success in business ventures?

Statistics reported in Small Business Trends show that in the first four years, 50 per cent of small businesses in the United States fail due to incompetence and lack of experience among other reasons including too much positive thinking according to a new study published in the European Economic Review.

The study looked at whether optimists were more likely to enter into entrepreneurship and whether optimism affected their performance. 

“By optimism, we mean systematically biased beliefs in the probability of doing well,” study author Dr. Chris Dawson told us, “overestimating the chances of success and underestimating the chances of failure.”

Dr. Dawson and his colleagues knew from some of their earlier research that optimists self-select into entrepreneurship.

Research also shows that the chances of success in entrepreneurship are very low and that most businesses fail quite early on. But of course, there is a chance (albeit a very small chance) that one can make it really big.

“Optimists are more likely to think they can beat the odds and are therefore more likely to select into entrepreneurship,” Dr. Dawson told us. “Entrepreneurship is often described as an expensive lottery ticket.”

If those entering entrepreneurship are the most optimistic, it follows that the more optimistic they are, the less they will earn. The idea is that optimists are too easily fooled into thinking they have found a good entrepreneurial project and that they have what it takes to exploit it successfully. So they pick objectively poor projects - projects that when seen through a realistic lens would be swiftly disregarded. Dr. Dawson points to the popular television program, Dragons Den as an example, where many people with wacky ideas more often fail than manage to secure an investment from a panel of successful celebrity entrepreneurs.

The study ended up finding that business owners with above average optimism earned some 30 per cent less than those with below average optimism.

“Many of the optimists would have been well advised to remain an employee,” study author Dr. Chris Dawson told us. “Optimists are more likely to make rash decisions based on wishful thinking and therefore take on poor entrepreneurial projects.” 

Dr. Dawson and his colleague David de Meza decided to conduct the study because of their long standing interest in optimism and entrepreneurship. 

“Economists are mainly interested in this idea because on average entrepreneurs earn less than employees, they work longer hours, they bear all the risk and have more stress,” Dr. Dawson told us. “So why would anyone want to be an entrepreneur? You have to have optimistic thinking to even contemplate it.” 

Dr. Dawson and fellow researchers used data from the British Household Panel Survey which is a nationally representative sample of 12,000 individuals who are tracked over 18 years (1991-2008). They tracked approximately 600 individuals from their days in paid-employment through to them setting up and  launching a business venture. Optimism was measured for individuals who were in paid-employment prior to becoming an entrepreneur, and was measured as the difference between their financial expectations for the year ahead and their actual financial outcomes. Controlling for earnings as an employee, greater optimism was found to be associated with lower entrepreneurial earnings. 

“Governments always try and promote start-ups on the basis that it’s unequivocally a good thing,” Dr. Dawson told us. “It should boost jobs, innovation etc. In reality we have too many people entering entrepreneurship and taking on poor entrepreneurial projects.”

Dr. Dawson says people are entering into entrepreneurship on little else than wishful thinking, hence why so many business fail.  

“It is true that there may be social benefits from new businesses such as through job creation,” Dr. Dawson told us. “But it should also be noted that when start-ups fail they are responsible for a great deal of job destruction.”