The Apprentice factor 'causes firms to fail'

Published on Wednesday 14 May 2008 22:14

BUDDING entrepreneurs possessed with unshakeable self-confidence often see their business ventures flounder because of their arrogance, according to a new study.

Psychologists believe cocksure tycoons, such as those featured in television shows like The Apprentice, are most likely to wade into markets that cannot support newcomers.

The study comes as Sara Dhada, a Leicester barrister, became the latest candidate to be fired on the hit BBC1 show. The 26-year-old was sacked by Sir Alan Sugar for failing to defend herself.

Researchers at the University of Leicester believe that over-confidence – a quality common in The Apprentice contestants – explains why many new businesses fail within their first few years. Those most at risk, it has been suggested, are companies helmed by individuals with "absolute" confidence – people who rush in, head first, with scant regard for their competition, or the size of the market.

The study, funded by the Economic and Social Research Council, was conducted by Dr Briony Pulford and Professor Andrew Colman, in collaboration with Dr Fergus Bolger, formerly of the University of Durham.

The study, published in the journal Experimental Psychology, set up a "game" that simulated market conditions where participants stood to gain capital, or make a loss, based on decisions they made in different market scenarios.

Players had to choose whether or not to open restaurants given different market scenarios, using a combination of skill and luck in order to perform.

Whenever market capacity was exceeded, winning or losing depended on skill in half the rounds and on chance in the others. Players' confidence was manipulated by giving them easy or difficult quizzes about business matters.

Dr Pulford, who led the study at the university's school of psychology, urged entrepreneurs to be wary if they have every confidence in their future success.

She said: "Our results showed that, when success depended on skill, over-confidence tended to cause excess entry into a market place.

"Market-entry decisions tend to be over-optimistic, with the inevitable result that new business start-ups tend to exceed market capacity, and many new businesses fail within a few years.

"Taking the housing market as an example; people have obviously over-entered that market. People are confident they can make a profit and don't compare themselves to other people who may be entering the market.

"This is why a lot of businesses fail, because people don't consider that there are plenty of people out there who are similarly confident."

However, the Federation of Small Businesses dismissed the study, pointing out that excessive regulation and high fuel and energy costs are more likely to cost young businesses.

Andy Willox, the FSB's Scottish policy convener, said: "A 'game' that simulates market decisions, no matter how complex or accurate, doesn't replicate the hard work, determination and grit that so many small-business owners put in."