Can a business owner’s confidence hinder more than help? In a 2014 review of the “Top 11 Reasons Businesses Fail” by CNBC the No. 2 reason (after “Money”) was Overconfidence.
Staples Hub writer Steve Strauss states, “Small business owners are a hearty, confident group. Of course, if they are willing to leave the known (a job, steady paycheck, benefits) for the unknown (starting a business, building a brand, getting customers, and making payroll) don’t they have to be?”
Strauss shares some surprising results of a Staples Small Business Survey on financial acumen. “It was found that 40% of those surveyed said they wished they knew more about managing a business before they jumped in, but they jumped anyway…so they tend to be a pretty optimistic and self-assured bunch.”
Making that statistic a bit more startling, however, is that 94 percent were confident in their ability to manage finances, but 55 percent couldn’t define basic accounting principles like “accounts receivable” when put to the test! Should they be so confident?
Chances are, if a business owner’s confidence level is detrimental to their business, they don’t necessarily recognize it. In fact, people raised in the last 40 years have likely been taught that confidence is one of the most desired character traits to possess. They might not even consider that the very quality that enabled them to quit the 9 to 5, apply for a small business loan, or lease that office space could now be leading them astray.
John Roseman, the parenting expert, penned “Parents Should Teach Courage, Not Confidence” and speaks on preparing children for the “real world of work and business.” He asserts, “The research strongly suggests that self-confident people are: A) hesitant to take on challenges unless they believe that are going to succeed, and B) are so sure of succeeding that they foolishly expose themselves and others to high-risk situations.”
So how does a business owner prevent the “foolish exposure” and the failures brought about by overconfidence?
STEP 1: Evaluate the process by which decisions are made, specifically a tendency toward bias.
Dr. Ali Binazir reveals in “Why Do Smart People Make Bad Decisions” that psychologists who have studied decision-making processes have observed “cognitive biases” that tend to get us in trouble including: The Overconfidence Bias, The Confirmation Bias, and Fundamental Attribution Error.
In Fundamental Attribution Error, the failures of others are believed to be due to character flaws, while our own failures are due to factors outside of our control. “Joe had to close his business because he just doesn’t understand margins. I had to close my business because the economy is in recession.”
Confirmation Bias has two parts. First, humans gather and trust information that supports their own beliefs. Second, they avoid, ignore, or downplay information that contests their own pre-existing ideas. For an example of Confirmation Bias, we need look no further than this election year coverage and our viewing habits. How much consideration and attention do we give to the opposing party or candidate versus our own? Do we tune out, or turn off, those with differing viewpoints? The answer is likely yes.
Binizar goes on to explain, “the Overconfidence Bias is merely ‘my guess is better than yours’ bias. People’s confidence in their own decisions tends to outstrip the accuracy of those decisions.”
All three biases can be rooted in overconfidence, so business owners’ efforts to limit foolish exposure should include a bias review.
STEP 2: Reflect on some recent decisions; evaluate HOW they were made and if the outcomes of those decisions were favorable.
The following sample questions can get an owner primed for this exercise:
Did you recently hire? If yes, did you “trust your gut” in the interview, or did you gauge the candidate’s skills and experience against the competencies required of the position?
Did you select a new distributor, supplier, or vendor? What “facts and probabilities” were considered in the selection process? Did cost of goods, delivery times, and contracted service terms carry more weight in your decision than more immaterial factors?
Did you find a new location? Make an investment? Decide to remodel? Select a new Point of Sale system? Buy a large amount of new inventory? If these, or other critical decisions were made recently, was due diligence given in researching the pros and cons of the selection and an informed decision made?
STEP 3: Determine what course of action will reduce unnecessary exposure.
If the business owner lacks the fundamental knowledge needed to conduct business, could they be trained by a mentor, take a class, or online course to increase their skillset?
If time is not available to train, the solution could be hiring. Whether it is hiring a professional to take on the owner’s deficient area, or hiring the staff needed to free up training time for the busy entrepreneur.
Or no action plan may be necessary at all. It’s possible that a new-found awareness of what impacts decision making may be sufficient in making the needed adjustments to reduce the risk of overconfidence.
Successful small business owners are not only confident, but resilient and open to change, able to pivot quickly, adept at applying new concepts, and they absorb information quickly. Strauss states it best, “One of the great things about being an entrepreneur is that the very nature of the gig requires you become a lifelong learner.”

Bern Carter is a contributing business writer for the Benicia Herald. She is a Coach/Consultant providing webinars, onsite workshops, and digital resources related to sales, service, and staffing for Small and Medium Businesses in the Bay Area. She serves SMBs nationally through berncarter.com. You can reach her via email at bern@berncarter.com.

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