Understanding the Entrepreneurial Mindset

By Executive Director, Dan Cohen

(Note: This is a blog, and not an academic paper. If this topic interests you, please read Cognitive mechanisms in entrepreneurship: Why and when entrepreneurs think differently than other people, by Robert A. Baron. This post draws heavily on that paper, particularly the downsides of entrepreneurial mindset section)

Entrepreneurship is a hot topic and stories about Sarah Blakely, Mark Zuckerberg, Elon Musk, Tory Burch, Steve Jobs and Jeff Bezos abound. People want to know more about the people who have changed the world through their inventions, innovativeness, drive, belief and passion. Much is said about their possession of an entrepreneurial mindset—almost to the point of inferring that it is something one is born with and which cannot be attained by mere mortals. In addition, it is typically framed as a purely positive thing, such as ‘she’s so entrepreneurial’ or ‘he sees opportunity where others see only risk.’ While there are many admirable and positive facets that encompass an entrepreneurial mindset, there are also some drawbacks and negative attributes that are in the makeup of an entrepreneurial mindset. This blog post is designed to tease out the entrepreneurial mindset—examining first what it is and then probing into both pros and cons of this way of thinking.

First, let us start with a definition of the entrepreneurial mindset: “Entrepreneurial mindset refers to a specific state of mind which orientates human conduct towards entrepreneurial activities and outcomes. Individuals with entrepreneurial mindsets are often drawn to opportunities, innovation and new value creation. Characteristics include the ability to take calculated risks and accept the realities of change and uncertainty” (http://on.ft.com/2CHFjSF). Central to this mindset is the pursuit and exploitation of opportunities (Shane & Venkatraman, 1997). Entrepreneurs spot opportunities that are there for all to see yet most do not see and then, even more rare, they pursue them and take action. How many times have you said, “I had that idea first’ or ‘I thought of that five years ago’ only to see someone else stake a claim to it. Entrepreneurs are willing to take the financial and psychic risks necessary to pursue an opportunity and are okay with the fact that a successful outcome is far from guaranteed. They pursue opportunities because they see something (technically called pattern recognition) that others miss. It is said that successful entrepreneurs live five years in the future—they share a vision for what is to come and are not tethered to how it is or used to be. They believe they will add value to the world and simply want to see it through to fruition. If they are wrong, they can live with it. What they cannot live with is NOT pursuing it. They often feel like they ‘have to do it.’

The positive attributes of an entrepreneurial mindset include spotting and exploiting opportunities regardless of resource constraints, mitigating financial and psychic risk, and taking action, which are all good things. There are some downsides, though, to an entrepreneurial mindset which are known as cognitive biases, such as confirmation bias, self-serving bias, the planning fallacy, and escalation of commitment.

• Entrepreneurs believe in their ideas wholeheartedly and this belief and passion is necessary while undertaking the immense challenge of getting an idea successfully to market. The downside, though, is that they often have blinders on when it comes to any type of negative feedback related to their idea. They hear what they want to hear from prospective customers or investors. This is called confirmation bias (Baron 1998). If a customer were to say, “I wouldn’t buy that in a million years” an entrepreneur with confirmation bias concludes that they want it but the timing is not right! Simply put, entrepreneurs hear what they want to hear. If it is something positive about their idea or startup, it is confirmation of their beliefs. If it is something negative about their idea or startup, they can be dismissive.
• While all humans have the self-serving bias (Baron 1998), entrepreneurs are particularly prone to it. Self-serving bias is simply—if something positive happens it is attributed to your action or doing. If something negative happens in the mind of the entrepreneur, it is due to some external factor beyond the control of the entrepreneur or the fault of someone else entirely. This can cause friction in a startup when entrepreneurs claim all successes and blame failures on others. Like the famous John F. Kennedy saying, “victory has a thousand fathers and defeat is an orphan.” Effective entrepreneurs share victory and defeat with team members and partners.
  
• Entrepreneurs can fall prey to the planning fallacy (Baron 1998). Entrepreneurs are optimists by nature and often believe they can accomplish much more in a shorter time-period than they actually can. They are future oriented, given the nature of entrepreneurship, and lacking current experiences, make plans about the future that have very little basis. They ‘make it up as they go along.’ It can be difficult to work with entrepreneurs if you expect cohesion to a plan due to the planning fallacy. Effective entrepreneurs learn to course correct if they go off track with poor planning. They also communicate changes to plans well with team members and customers.
• Entrepreneurs typically have very strong identities tied to being entrepreneurs. It is hard to separate the venture from the venturer! This is one reason why entrepreneurs are known to have such grit and persistence. They do not quit because they quite literally would be quitting on themselves. This makes them susceptible to escalation of commitment (Baron 1998). Entrepreneurs who find themselves in a failing venture often think they can save it by working harder or investing more money (or enticing others to do it). This occurs because it is hard to admit failure; it is hard to give up on a dream, the loss of ‘face’ or image that occurs when admitting a mistake (Baron 1998). Entrepreneurs are often overly optimistic and believe things will get better despite evidence to the contrary. As a result, entrepreneurs often ‘throw good money after bad.’ The lean startup movement has helped this issue because entrepreneurs are learning to value evidence and validation that only comes from a market. Still this is a cognitive bias that plagues entrepreneurs. Successful entrepreneurs know when to ‘shoot the dog early’ and call it quits when market validation does not materialize.

In conclusion, there are many positive attributes to developing an entrepreneurial mindset. While in the process of developing this mindset, please also be aware of cognitive biases that can negatively affect entrepreneurs, their team members, and their families. Maximizing the positive aspects of an entrepreneurial mindset (spotting and exploiting valuable opportunities without regard to resource constraints) while controlling the negative aspects (cognitive biases such as confirmation bias, self-serving bias, planning fallacy and escalation of commitment), will help nascent entrepreneurs cultivate an effective mindset that can truly be a personal competitive advantage.