Published: Sunday, May 26, 2024
Credit: William Fortunato, Pexels
Entrepreneurs are at the heart of every innovative economy.
It has been proven that new business creation can have a positive and significant impact on economic development, innovation and the creation of jobs. It’s not easy and most businesses fail.
In most cases, a person’s family is involved in the process of starting a new business. The emotional rollercoaster that comes with entrepreneurship can be experienced by all of them.
The founders’ lives also have ups and lows.
The start-up of a new business can be affected by both positive and negative changes.
Only a small amount of research has been done to determine the extent of their effects on new venture formation.
We recently conducted a study to determine how large family events can affect new business ventures.
Our findings show that positive family events, by inducing overconfidence, can be more detrimental to the survival of a new venture than negative ones.
Emotions can have complex effects
The data collected from the Australian Household, Income and Labor Dynamics Survey (HILDA), was used to analyse the emotions entrepreneurs feel when they experience major family events.
In our study, we found that positive events usually helped new ventures survive and negative events generally hurt them.
Existing research, however, may simplify this relationship. The family structure, including its relationships, emotions, and goals can affect the mental state of an entrepreneur and their decision-making.
It is important to consider the effect of founders’ levels of confidence. It is important to have confidence when starting a new business. However, it can be a problem if entrepreneurs are overconfident.
Some positive events may lead to an overconfidence. This could be in the form of overconfidence about one’s capabilities or overconfidence in one’s beliefs.
We found, perhaps contrary to expectations, that the overconfidence resulting in positive family events negatively affected the survival of new ventures. This was greater than the impact of explicit negative events.
What could be the cause?
Two important theories in psychology can help to explain why overconfidence is harmful.
First “affect-as-information theory” suggests that our emotions serve as a kind of compass, guiding us to understand whether a situation is beneficial or harmful.
Entrepreneurs who feel good about a family event like the marriage of a childhood sweetheart may rely on their knowledge and heuristics.
Second, entrepreneurs can fall victim to “affect-priming”, where emotions are said to influence decisions by automatically bringing related memories and ideas up.
This may influence not only what they think but also the way they think. If entrepreneurs are in a positive mood, they will use memories that have been associated with positive emotions, whether or not those memories are relevant, to help them make decisions.
These theories suggest that the major events in a family’s life can affect an entrepreneur’s confidence, by automatically and subtly adjusting their evaluation of opportunities and risks.
Positive family events can lead to a more holistic way of thinking and a quicker decision-making process. Entrepreneurs who are under pressure to make fast and efficient decisions can benefit from this.
Positive family events can reinforce overconfidence in entrepreneurs who are confident that they alone will compensate for any informational gaps.
Entrepreneurs may also believe that tasks are simpler than they are when they think they are better than others.
It can be a mistake that has a negative impact on new businesses.
What is the role of research in assisting entrepreneurs?
The study reveals the importance of family to the entrepreneurial process.
Entrepreneurs must be mindful of their emotional state and their confidence level.
Entrepreneurship programs and training often concentrate on the business strategy to ensure new ventures are successful. According to this research, it’s important to include elements such as maintaining emotional health and managing major family events.