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The Impact of Entrepreneurs' Psychology on Their Businesses
Business Journal

The Impact of Entrepreneurs' Psychology on Their Businesses

by Sangeeta Bharadwaj Badal

Story Highlights

  • The most successful entrepreneurs exhibit 10 talents
  • The younger the business, the more talent predicts performance
  • Self-limiting or self-inflated views can hamper entrepreneurs

In many ways, it's never been easier to become an entrepreneur. Technology and easy access to information have lowered the barriers to entry. The problem is, not all businesses survive -- in fact, half are gone within five years. And many of the ones that do survive merely hobble along.

Given this, it makes a lot of sense to search for predictors of success. There are many factors that predict business success, some organizational, some ecological. But of utmost significance to business survival are the individual differences in entrepreneurs' psychology.

Entrepreneurs Are Susceptible to Bias and Errors

As early as the 1930s, economists such as Irving Fisher and John Maynard Keynes stressed the impact of psychological factors on economic behavior. Studies suggest that entrepreneurs can be susceptible to biases and errors, such as over-optimism, hyper-core self-evaluation (extremely positive self-assessment) or illusion of control. These behaviors and biases can make or break new ventures.

Taking a uniquely psychological approach to understanding entrepreneurial performance, Gallup has identified 10 talents exhibited by the most successful entrepreneurs. Talents are a composite of our basic personality traits and intellectual abilities; they facilitate accelerated learning and performance in a particular domain and determine how successful an entrepreneur is likely to be building a business.

Looking at a nationally representative sample of 2,657 business owners in the U.S., Gallup found that entrepreneurial talent is an important determinant of success at all stages of the business life cycle -- from startup (year zero) to established (years four and beyond ). But the relationship between talent and business performance is especially strong in startup environments.

Gallup research indicates that the younger the business, the stronger the role of entrepreneurial talent in predicting performance. The relationship between Gallup's talent measure and business performance (a composite of profitability, sales, intent to grow and intent to hire) in year zero is .459. For businesses in years one, two and three, the validity of talent predicting performance drops to .237. And it further drops to .216 for businesses at years four and beyond (all coefficients are significant at .01 level). However, even established businesses should see substantial improvement in performance if entrepreneurs identify and nurture their talent.

It makes sense that the entrepreneur's talent has a direct, as well as the strongest, relationship with business success when the business is new and small. New businesses are rife with ambiguity and day-to-day challenges. Lack of formal rules, protocols and hierarchies makes the environment volatile and unpredictable. Entrepreneurs are involved in every aspect of running their business, decision-making tends to be in their hands and their behaviors and actions directly influence a wide range of business outcomes. Fear, self-doubt, confidence, over-optimism, entrepreneurial myopia (where entrepreneurs fall in love with their creations), risk propensity and overestimation of one's ability all can exert a profound impact on performance.

What Happens as Companies Grow Older

As the company grows older and bigger, the relationship between entrepreneurial talent and business success, though still substantial, becomes less direct, and there's a shift in the entrepreneur's decision-making process. Growing companies acquire organizational hierarchies, specialized workforces and formal and well-established rules and protocols, which creates a distance between a business owner -- who's now in the more strategic role of CEO -- and front-line employees. Direct communication is replaced with a chain-of-command structure. As a result, the direct link between talent and business performance, as seen in the early stages, is replaced by a more indirect, though still relevant, relationship between the owner's personality and company performance.

Because an entrepreneur's talent can predict the success or failure of a business, especially a new firm, it's imperative for entrepreneurs to assess and understand their inherent talents. The biggest challenge entrepreneurs face is their own self-limiting or self-inflated view of their capabilities. Gallup's advice to all current entrepreneurs, as well as those planning to start a business for the first time, is to identify your strengths and watch out for inherent biases and blind spots in your personality that can affect your venture's performance and ultimate success.

A version of this article originally appeared on Virgin.com.

Gallup


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