Financial Optimism and Entrepreneurial Satisfaction

• Published date: 01 June 2017
• DOI: http://doi.org/10.1002/sej.1244
• Date: 01 June 2017
• Author: Chris Dawson

FINANCIAL OPTIMISM AND ENTREPRENEURIAL

SATISFACTION

CHRIS DAWSON*

School of Management, University of Bath, Bath, U.K.

Research summary: Adding to the literature thatoptimists are attracted to entrepreneur-

ship, this article finds that prior financial optimism has detrimental consequences for

entrepreneurial pay satisfaction. Optimists overestimate the likelihood of positive events

and will, therefore, tend to overestimate their prospects in entrepreneurship. It follows

that conditional on realized entrepreneurialperformance, optimists’subsequentpay satis-

faction is lower through disappointment. These findings are consistent with theories of

self-discrepancy from social psychology. Evidence is also provided that optimism reduces

employee pay satisfaction, but since self-employment widens the scope for prospects tobe

exaggerated, the effects are stronger in self-employment. While selection on optimism

implies that entry into entrepreneurship is likely to be excessive, optimism by reducing

entrepreneurialpay satisfaction may increase entrepreneurial exits.

Managerial summary: This article examines how prior financial optimism affects

entrepreneurial pay satisfaction. Optimists have a generalized tendency to overestimate

the likelihood of positive events and will, therefore, tend to overestimate their prospects

in self-employment. The results suggest that prior financial optimism reduces entrepre-

neurial pay satisfaction through disappointment. The same is true for employee pay

satisfaction, but since entrepreneurship is typically a more uncertain and turbulent

environment, making prospects harder to evaluate, the effects are found to be stronger

in self-employment. Copyright © 2016 Strategic Management Society.

INTRODUCTION

Why do people become self-employed? Evidence

suggests that the self-employed earn less, have more

role ambiguity, and work substantially longer hours

than their counterparts in paid employment. In partic-

ular, Hamilton (2000) suggests that entrepreneurs

have both lower initial earnings and lower earnings

growth than employees.

1

Åstebro et al. (2014) in

reviewing the evidence on entrepreneurial returns,

report that not only is it an activity with low median

returns, but with a very highvariance, suggesting that

most entrepreneurs perform poorly while a few are

extremely successful. Moskowitz and Vissing-

Jorgensen (2002) report that entrepreneurs invest, on

average, 70 percent of their wealth in the businesses

they run, while the return on their investment is equal

to investing in a market tracking scheme. These find-

ings suggest that a model of occupational choice

based on the expected utility framework may not

fully encapsulatethe decision to become an entrepre-

neur, and that any non-pecuniary motivations for

entry do not purely reflect leisure preferences. An

alternative explanation for which there is accumulat-

ing evidence is that entrepreneurship attracts

Keywords: optimism; economics; self-employment; entrepre-

neurship; job satisfaction

*Correspondence to: Chris Dawson, University of Bath, School

of Management, Claverton Down, Bath, BA2 7AY, U.K.

E-mail: c.g.dawson@bath.ac.uk.

Correction madeon 2/21/17, after first online publication: Equa-

tion 5 mistakenly displayed “+1”in normal casing, where it

should have been subscript.This error has been corrected.

1

It is important to note that while the self-employed are an

incongruent group, self-employment status is commonly used

to measure entrepreneurial status where researchers rely on

secondary analysis of existing data. While recognizing the

limitations, “self-employed”and “entrepreneur”are used

interchangeably throughout the discussion.

Copyright © 2016 Strategic Management Society.

Strategic Entrepreneurship Journal

Strategic Entrepreneurship Journal, 11: 171–194 (2017)

Published online 10 February 2017 in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1244

optimists (Arabsheibani et al., 2000; Cassar, 2010;

Dawson et al., 2014; Puri and Robinson, 2013).

Optimists overestimate the likelihood of positive

events and are attracted by activities that encourage

optimism (de Meza and Southey, 1996). Entrepre-

neurship offers fertile conditions for optimism to

thrive, since optimism tends to be highest under

uncertainty and when the chances of success are

under the individual’s control. Optimists will also

tend to overestimate their prospects in paid employ-

ment, but since entrepreneurship offers greater scope

for optimistic thinking, optimists will be dispropor-

tionately attracted to self-employment and, as a con-

sequence, entry is likely to be excessive (de Meza

and Southey, 1996).

The self-selection of optimists into self-

employment suggests that many entry decisions can

be viewed as mistakes, made by boundedly rational

decision makers and based upon misperceived pro-

spects (Camerer and Lovallo, 1999). Those with a

general tendency to overestimate the likelihood of

positive outcomes may view the entrepreneurial

returns distribution too favorably when assessing

their own entrepreneurial project (Åstebro et al.,

2014). They may also overestimate their entrepre-

neurial ability and chances of entrepreneurial suc-

cess with an overriding feeling that they can beat

the odds (Camerer and Lovallo, 1999). If optimists

overestimate their prospects in entrepreneurship,

then excessive entry is not the only adverse conse-

quence. Overestimating entrepreneurial prospects

implies actual realized returns will be lower than

expected. The higher the optimism, the higher the

probability that the entrepreneur will suffer a dis-

crepancy between actual performance and expected

performance. Using self-discrepancy theory from

social psychology (Higgins, 1987), it is argued that

optimism, by increasing this performance disparity,

will lead to lower levels of entrepreneurial satisfac-

tion, especially satisfaction with pay. Not only is job

satisfaction an important predictor of many aspects

of labor market behavior, but it is also an important

predictor of overall well-being (Argyle, 2013), and

as Georgellis, Sessions, and Tsitsianis (2007) point

out, satisfaction with pay is highly valued by the

self-employed and is an important determinant of

self-employment exits.

To investigate this proposition, this article

undertakes an empirical investigation using data

from the British Household Panel Survey (BHPS)

covering 1991–2008. Optimism is constructed as

the miscalibration between a person’s short-term

financial expectations and their financial outcomes

that follow. Importantly, optimism is measured for

individuals while in paid employment prior to entry

into self-employment. This measure of financial

optimism is related to the psychology literature

concerning optimistic bias, where individuals over-

estimate the probability that a favorable outcome

will occur or underestimate that a negative outcome

will occur (Weinstein, 1980). Optimism bias is also

closely related to the form of overconfidence that

Moore and Healy (2008) categorize as overestima-

tion, where there are miscalibrated beliefs in one’s

ability or performance. These measures of opti-

mism are distinct from the dispositional optimism

and positive psychology perspective. Here, opti-

mism is not viewed as a biased or miscalibrated

perception about the probability of a future event

occurring, but as a generalized outcome expectancy

that good things will happen, usually operationa-

lized with the life orientation test inventory

(Scheier, Carver, and Bridges, 1994). Prior work

linking optimism to entrepreneurship has tended to

focus on biased beliefs specific to the individual’s

entrepreneurial ability and chances of entrepreneur-

ial success (Camerer and Lovallo, 1999; Landier

and Thesmar, 2009). Financial optimism is comple-

mentary but distinct and conforms to the definition

used in economics where optimism is considered to

be a more stable individual trait associated with gen-

erally positively biased expectations, not domain

specific to a certain project (Åstebro et al., 2014).

More formally, economists define an optimist as an

individual who generally “revises up the probability

of favorable events and revises down the probability

of unfavorable events”(Hey, 1984: 183). Dawson

et al. (2015) corroborate that this measure of finan-

cial optimism captures a general bias, as it is highly

correlated with other aspects of overly optimistic

behavior, such as smoking. The psychology here is

that optimists tend to underestimate that negative

events will occur, including outcomes such as illness

and injury, which can lead to optimists forgoing pre-

cautionary interventions (Weinstein, 1980).

In line with these predictions, the key finding of

this article is that the higher the financial optimism

among entrants into self-employment, the lower

their level of subsequent self-employed pay satis-

faction conditional on self-employed performance;

prior performance in paid employment; prior

employee job satisfaction; and a range of other

172 C. Dawson

Copyright © 2016 Strategic Management Society. Strategic Entrepreneurship Journal, 11: 171–194 (2017)

DOI: 10.1002/sej