Why You Shouldn’t Start a Small Business, But Probably Will If You Were Going To, Even After Reading This
“The evidence suggests that optimism is widespread, stubborn, and costly.” - Daniel Kahneman from Thinking, Fast and Slow
In my last TIL: The Truth Behind the Pavlov Psychology Principle and Other Stuff I Just Made Up..., I wrote about the the frequent occurance of eventually links, parallels, or explanations of one topic to that famous Pavlov’s Dog and Bell experiment that no one cares about except for the author and other future authors who are going to write about it because it is interesting in theory.
But more to the point, let me first explain I don’t know anything about statistics and after reading half of Thinking, Fast and Slow by Daniel Kahneman, I understand that thinking statistically, even for statisticians is difficult.
Not impossible.
But we have a statistically tendency to ignore the facts and instead conflate the issue or ignore it.
Furthermore, I have no illusions I can explain regression to the mean.
“Indeed, the statistician David Freedman used to say that if the topic of regression comes up in a criminal or civil trial, the side that must explain regression to the jury will lose the case.” - from Thinking, Fast and Slow by Daniel Kahneman
But I do pretend I understand it.
0 to 1 and base rates...
At least I have optimism though, right…?
Wrong.
“The prevalent tendency to underweight or ignore distributional information is perhaps the major source of error in forecasting. Planners should therefore make every effort to frame the forecasting problem so as to facilitate utilizing all the distributional information that is available.
This may be considered the single most important piece of advice regarding how to increase accuracy in forecasting through improved methods.” - from Thinking, Fast and Slow by Daniel Kahneman
“The planning fallacy is only one of the manifestations of a pervasive optimistic bias. Most of us view the world as more benign than it really is, our own attributes as more favorable than they truly are, and the goals we adopt as more achievable than they are likely to be. We also tend to exaggerate our ability to forecast the future, which fosters optimistic overconfidence. In terms of its consequences for decisions, the optimistic bias may well be the most significant of the cognitive biases.” - from Thinking, Fast and Slow by Daniel Kahneman
Great!
Now I have the most significant cognitive bias of all the biases…
Well damn.
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And now the moment you’ve been waiting for…. Why You Shouldn’t Start a Small Business, But Probably Will If You Were Going To, Even After Reading This:
“The chances that a small business will survive for five years in the United States are about 35%. But the individuals who open such businesses do not believe that the statistics apply to them. A survey found that American entrepreneurs tend to believe they are in a promising line of business: their average estimate of the chances of success for “any business like yours” was 60%—almost double the true value. The bias was more glaring when people assessed the odds of their own venture. Fully 81% of the entrepreneurs put their personal odds of success at 7 out of 10 or higher, and 33% said their chance of failing was zero.” - from Thinking, Fast and Slow by Daniel Kahneman
Summation: Entrepreneurs are even more irrational than the rest of us.
The upside?
“One of the benefits of an optimistic temperament is that it encourages persistence in the face of obstacles. But persistence can be costly.” - from Thinking, Fast and Slow by Daniel Kahneman
Plus if none of us take action because we are statistically probable to fail, what would any of us do all day?
Be rational? Yeah right...
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All this may have you discouraged and talked out of starting a business, but don’t worry like I said you probably will go ahead anyways.
You will treat the statistics provided as statistical base rates normally are—noted and promptly set aside.
And join the ranks of hordes of people who will touch the sun or die trying.
Follow me @strangerarray and donate because I will touch the sun or die trying.
Please check out my recent TIL post:
Or my final Sunday Series post:
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P.S. Before you go, do you have Student Loans and are looking for ways to save money?
I recommend Credible.
Use my link to get $200 !
Of course that statistic doesn't apply to me! ;)
Absolutley correct!
And by the way, we are all above average. ;)