Fear of failure is a well known feeling to many of us, whether it occurs because of an exam or while giving an important presentation. Entrepreneurs are no exception here: entrepreneurial choices can be dominated by fear of failure. By many, fear of failure in entrepreneurship is seen as an obstacle to be overcome.
For example premier Rutte in his Koning Willem 1 lezing on October 1, 2015 calls on Dutch entrepreneurs to be less fearful and take example in their American counterparts. But there are also voices that describe fear of failure as a powerful motivator. Will Smith, actor, musician and entrepreneur, when asked about the key for his success turns the conversation to failure. "I've always had a horrible fear of not achieving …" he told Parade magazine. "All it takes is just one person telling me I can't do it, and I'll use the fear of failure as fuel.". Which view is the correct one? Or more precisely, under which circumstances can fear of failure indeed be a motivator? I argue that fear of failure may be seen and analyzed as a form of loss aversion. For those experiencing such fears, losses (i.e. failures) weigh more heavily than gains (i.e. successes), both of which are measured relative to some reference point. This reference point represents a would-be entrepreneur’s aspiration level for achieving success.
There are two important entrepreneurial decisions to consider. Potential entrepreneurs decide first whether to enter into risky entrepreneurship or opt for a safe employment wage. In a second step, they choose the intensity of investment into their ventures, which can be seen as the actual monetary investments but also investments in terms of working hours. These investments, together with random factors such as luck as well as the level of competition determine the chances of success of each venture.
Considering fear of failure through the lens of loss aversion, we find that while the effect of fear of failure on entry decisions is unambiguously negative, i.e. higher fear of failure discourages entry into entrepreneurship; its effect on entrepreneurial investment is ambiguous and depends crucially on the reference point. Ambitious entrepreneurs with high aspiration levels invest more aggressively with an increase of fear of failure, while entrepreneurs with low aspirations decrease investments as they become more fearful. Thus, while fear of failure is indeed often an obstacle to be overcome, ambitious entrepreneurs can use fear of failure as a “fuel” for success.
The reason that the effect of fear of failure on investment decisions is ambiguous comes from the dual effect that an increase in fear of failure has on investment incentives. On the one hand an increase in fear of failure increases the perceived cost of investment, which depresses incentives to invest. On the other hand, failure becomes more painful, increasing incentives to invest and thereby avoid failing. Entrepreneurs holding high aspirations find failure exceptionally painful, so the latter effect dominates. For entrepreneurs with lower aspirations, the former dominates.
These insights have important implications for the evaluation of fear of failure in entrepreneurship. Viewing fear of failure as a universally bad trait, as premier Rutte seems to suggest, may be too short-sighted. While conquering entrepreneurial fears will lead to more entrepreneurial entry, entrepreneurial investments may well decrease as a consequence, if entrepreneurs carry high aspirations. The effect of this interaction between aspirations and fear of failure on investment represents a novel testable prediction that will hopefully be at the focus of future studies. Indeed, an empirical analysis of fear of failure that fails to account for the reference point will be misspecified and thus produce misleading results.
This opinion article is based on a paper co-authored with John Morgan (University of California, Berkeley), titled “Aspiring to Succeed: A Model of Entrepreneurship and Fear of Failure” (Journal of Business Venturing, forthcoming).