Optimists Are the Salt of the Earth. And Salt Can Burn the Roots of Innovation
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Optimists Are the Salt of the Earth. And Salt Can Burn the Roots of Innovation

OVERLY OPTIMISTIC ENTREPRENEURS ARE UNABLE TO REVISE EXPECTATIONS AFTER NEGATIVE FEEDBACK, ACCORDING TO A STUDY ON 205 SPANISH ENTREPRENEURS. THEY TEND THUS TO INVEST IN TOO MANY PROJECTS TO THE DETRIMENT TO INNOVATION EFFECTIVENESS

Optimism as a personal trait of entrepreneurs is associated with a failure to learn from one’s own failures and can hence hamper a firm’s innovation effectiveness, according to research by Mario Daniele Amore (Bocconi Department of Management and Technology), to be published in Organization Science.
 
“The ability to update beliefs as a function of the signals received is key to entrepreneurial performance because it can reduce systematic biases and raise alertness,” Professor Amore says. “We show that overly optimistic entrepreneurs are less inclined to revise their expectations downward after receiving negative feedback on past performance. This makes them prone to invest in too many innovation projects, irrespective of their potential for success; which, in turn, results in reduced innovation effectiveness.”
 
Prof. Amore and his co-authors Orsola Garofalo (Copenhagen Business School) and Victor Martin-Sanchez (King’s College London) tested 205 Spanish entrepreneurs in a laboratory setting in order to measure their degree of optimism and complemented this information with survey-based accounting information on the firm of each entrepreneur who participated in the experiment in order to assess their innovativeness.
 
They observed participants’ expectations about the likelihood of winning a subsequent competition and then evaluated how those expectations are shaped by the feedback they receive after losing a competition. The empirical analysis indicates that optimism is negatively associated with the propensity of entrepreneurs to revise expectations downward about their individual performance upon receiving negative feedback. Moreover, the analysis shows that, while there is a positive association between optimism and the level of innovation inputs (R&D expenditures), optimism is negatively associated with the ability to derive innovation output (patents or product and process innovation) from such R&D inputs. By contrast, the tendency to revise performance expectations downward is associated with higher innovation effectiveness.
 
“In the wake of our results,” Prof. Amore concludes, “entrepreneurs should understand that learning is an essential element of a firm’s success and they should be willing to listen to the feedback from people surrounding them. Furthermore, our findings suggest that accounting for psychological elements is critical to the design of effective entrepreneurship education programs aimed at encouraging the critical assessment of external signals.”
 
Mario Daniele Amore, Orsola Garofalo, Victor Martin-Sanchez, “Failing to Learn from Failure: How Optimism Impedes Entrepreneurial Innovation”, forthcoming in Organization Science, available on SSRN.

by Fabio Todesco

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