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Entrepreneurs are the lifeblood of any innovative economy.

New business creation has been shown to have a significant and positive impact on economic growth, innovation and job creation. But it isn’t easy, and most new businesses fail.

When someone starts a business, they usually aren’t doing it alone – their whole family forms part of the journey. All of them can experience the emotional rollercoaster of entrepreneurship.

This obviously flows in the other direction as well – founders’ personal lives have their own big ups and downs.

Big positive changes in a family – including job promotions, weddings and new babies – and negative changes – such as when someone sadly passes away – can really shake things up for someone trying to start a business.

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Yet only minimal research has looked into the extent of these effects on new venture creation.

In a recently published study, we looked at how big family events affect the success of new ventures.

Surprisingly, our findings reveal that by making entrepreneurs overconfident, certain kinds of positive family events can have a bigger detrimental effect on new venture survival than negative ones.

Emotions have complicated effects

We used data from the Australian Household, Income and Labour Dynamics (HILDA) survey to analyse the emotions caused by major family events that entrepreneurs experience.

Our study found that many of these family events had the influence you’d expect based on both intuition and past research – positive events typically helped and negative events typically harmed new venture survival.

But existing research may oversimplify this connection. The structure of a family – their relationships, emotions and goals – can affect an entrepreneur’s mental state and decision-making in complicated ways.

The effect on founders’ confidence levels is particularly important. Confidence is necessary to start a business, but can become a problem in excess when entrepreneurs overestimate their own abilities.

Notably, some positive events can lead to overconfidence, which could take the form of being overly optimistic about the extent of one’s abilities, or overestimating the accuracy of one’s own beliefs.

And perhaps counter-intuitively, we found that overconfidence resulting from positive family events had a negative impact on new venture survival. This impact was bigger than the impact of explicitly negative events.

Why might this be happening?

Two key theories from psychology may help explain why overconfidence ends up being 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.

When entrepreneurs feel good due to a positive family event, like marriage to a childhood sweetheart, they may lean on their existing knowledge and heuristics.

Second, entrepreneurs may succumb to “affect priming”, which suggests that emotions influence decision-making by automatically bringing up related ideas and memories.

Such priming may not just influence what they think, but also how they think. For example, if entrepreneurs are in a good mood, their mind will offer up memories linked to positive emotion – whether relevant or not – to help them make decisions.

These theories suggest that major family events can influence an entrepreneur’s confidence by subtly and automatically adjusting how they evaluate opportunities and risks in decision-making.

On the one hand, positive family events may lead to a more holistic thinking style and rapid decision-making. This can be beneficial for entrepreneurs who need to make quick and efficient decisions under time and resource constraints.

However, if entrepreneurs are too confident, believing that their abilities alone can make up for any lack of information, positive family events may just reinforce this overconfidence.

Like other people, when entrepreneurs think they’re better at things than they actually are, they may begin to believe tasks are easier than they really are.

This can lead to errors in judgement that seriously harm new ventures.

How does the research help entrepreneurs?

Our study highlights the embeddedness of family in the entrepreneurial process.

Entrepreneurs need to be aware of the need to carefully manage their own emotional state, particularly their confidence levels.

Entrepreneurship training and support programs often focus solely on business strategies to make new ventures succeed. This research suggests it is also important to incorporate elements like maintaining emotional health, managing major family events and accessing support. The Conversation

Pi-Shen Seet, Professor of Entrepreneurship and Innovation, Edith Cowan University and Wee-Liang Tan, Adjunct Associate Professor of Strategic Management, Singapore Management University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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