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The Psychology of Entrepreneurs Drives Business Outcomes
Business Journal

The Psychology of Entrepreneurs Drives Business Outcomes

by Sangeeta Bharadwaj Badal, Ph.D.

Story Highlights

  • Personality traits and economic behavior are strongly linked
  • Personal desire for achievement tied to business success
  • Risk-takers thrive in complexity, uncertainty and urgency

Smart leaders of countries and cities know that a thriving entrepreneurial sector is a key to economic growth and the creation of good jobs. In the U.S. alone, 50% of all jobs are in small businesses and approximately 65% of all new good jobs are created by them, according to the Small Business Administration. Finding and developing successful business builders is critical to any society that wants to thrive economically.

But leaders who are trying to uncover entrepreneurial talent in their midst should first ponder these questions:

What separates successful business owners from less successful ones?

What are the traits and behaviors that drive an individual to start, sustain and grow a successful company?

How does the psychology of entrepreneurs influence their decision-making?

Do entrepreneurial attitudes toward autonomy, risk, work and income affect business outcomes?

Are the personality characteristics required to create a venture different from those that facilitate a venture's expansion and growth?

Intrigued by these questions and many others, Gallup studied 2,500 entrepreneurs to understand the actions and decisions that lead to venture creation and growth. One of the many things we discovered is how the psychology and innate talents of the entrepreneur affect business outcomes.

The Entrepreneur's Gut Instinct

Ronald Perelman, the CEO and chairman of MacAndrews & Forbes Holdings, recently committed $100 million to the Columbia Business School to teach the next generation how to become entrepreneurs. Even though the school will use the funds to create courses on entrepreneurship that teach a person the skills to successfully manage a business, Perelman acknowledges that entrepreneurship is based on one's "gut instinct." He goes on to describe gut instinct as one of those things you either have or you don't.

Gut instinct is a term used to explain what you feel intuitively or instinctively about something -- a recurring pattern of thought, feeling or behavior dependent on the circuitry of your brain. The intricate wiring of the brain differs from person to person and determines our unique personality and preferences.

Our basic personality characteristics are a function of our brain circuitry; they are enduring and stable over time and across different situations. This consistency of personality traits allows us to predict broad classes of individual behaviors. You can learn who a person is by observing his or her behaviors because there is an underlying consistent thread in those behaviors based on his or her personality traits.

As far back as the 1930s, economists like Irving Fisher and John Maynard Keynes have studied the link between personality characteristics and economic behavior. Since then, research has clearly established positive significant relationships between different personality characteristics or talents -- need for achievement, risk propensity, passion, creativity, autonomy and self-efficacy -- and entrepreneurial outcomes such as sales and profit.

Let me share some examples. Researchers at the department of psychology at the University of Giessen, Germany, found that self-efficacy -- belief in one's ability to do a task well -- has a high correlation to business creation and success. In fact, they found that the correlation between self-efficacy and business success was as high as the correlation between the weight and height of adults in the U.S. -- one of the highest medical correlations. High self-efficacy motivates an individual to take initiative, persevere in the face of resistance and have self-confidence and a hopeful outlook for the future -- behaviors that lead to venture success.

Similarly, other researchers have found a strong correlation between achievement orientation (a personal desire for achievement) and business success. Entrepreneurs with a strong desire for achievement set high standards for themselves and others around them. They constantly look for better ways to accomplish a task. They anticipate problems and are willing to take risks to achieve their goals. These talents trigger behaviors that ultimately lead to business success.

Researchers have also extensively studied the relationship between risk taking and business success. Risk-takers are likely to try something adventurous or to take a gamble. They thrive in high-stakes environments and have a higher propensity to engage in risky ventures. In entrepreneurship, this translates into an overly optimistic perception of risk. This helps them start a business or take an existing business to the next level. Risk-tolerant individuals are likely to thrive in complexity, uncertainty and urgency. No obstacle is too great and no challenge is too difficult for them. They are likely to invest in new projects and explore new markets when people who are more risk-averse may be paralyzed by fear of the unknown.

To this research, Gallup -- from our assessment of 2,500 U.S. entrepreneurs -- adds that higher levels of entrepreneurial talent significantly increase one's odds of business success. Highly talented entrepreneurs, compared with their less talented peers, are:

  • three times more likely to build large businesses and to grow them significantly
  • four times more likely to create jobs
  • four times more likely to exceed profit goals
  • five times more likely to exceed sales goals

In short, entrepreneurs' psychology and innate talents are predictors of business success. Leaders who want to uncover the people with the right makeup to build and sustain a business should understand this fundamental point.

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