The absurdities of human nature
By Annita Akinkindi
It is the ultimate irony. For all the progress humankind has made in the last century, when it comes to our fears, we go about our business with thinking apparatus still largely custom-made for Stone Age life on the savannah. Therefore actual risks tend to slip by us while more remote eventualities get all the attention.
Take phobias. We tremble at the thought of snakes and spiders, which are no longer very likely to kill us, while remaining cheerfully calm about guns and cars, which might.
We also seem better at responding to immediate risks as opposed to long term risks which is quite understandable when being chased by a crazed elephant, but less helpful when evaluating the potential damages brought on by climate change.
So what risks do entrepreneurs most misperceive? Common errors are misjudging the size of the market and underestimating the competition. Scientists have come up with reasons for this.
The first is our illusion of control. Despite what our rational selves would insist, on some level we seem to believe that our thoughts can influence reality.
This false sense of security manifests itself in dangerous ways when it comes to running a business. Just as we feel safe behind the wheels of our cars though we don’t control anyone else’s, so too do we like to think that ignoring our rivals’ ability to improve on our ideas, muscle in on our customers or undercut our prices will make the competitor go away.
The second is the tendency to take a substantial risk of a bigger loss rather than the certainty of a smaller one. In a famous experiment, more subjects said they’d rather be certain of saving the lives of 200 people than take a one-third gamble to save 600. Flip the phrasing, though, and the decision flips too.
This implies that when things go really wrong, entrepreneurs who would be wise to cut their losses may be more inclined to dig deeper holes.
Perhaps the most misleading bias of them all is optimism, something entrepreneurs tend to have in spades. When researchers question people about their expectations and compare them with harsh statistical facts, it turns out that we tend to underestimate darker risks, such as dying prematurely or suffering financial setbacks.
In one paper, subtitled “Evidence of self-deception among the self-employed,” four professors from British universities crunched numbers from five years’ worth of surveys that asked people to compare their current financial situation with the previous year’s and their expectations for the following year. Most subjects were overly optimistic about their fortunes, and entrepreneurs even more so. For employees, the ratio of optimistic errors to pessimistic errors was 1.55; for the self-employed, it shot to 2.13. Then again, without optimism, we might still be stuck in the Stone Age.
Filed under: BUSINESS ACUMEN |