Over-optimism in the newly self-employed

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(Image: Pixabay)
(Image: Pixabay)

Autonomy is something people cherish. Those who long for independence in their daily working lives may decide to become self-employed. This step toward greater freedom should after all contribute to greater life satisfaction. But does self-employment actually live up to these high expectations? Researchers at the University of Basel have investigated the topic.

How happy with their lives are individuals who have taken the plunge into professional independence? A team of researchers led by Professor Alois Stutzer from the University of Basel’s Faculty of Business and Economics have undertaken a study to examine this issue, and have published the results in the Journal of Behavioral and Experimental Economics.

They evaluated nationally representative longitudinal data for Germany. Data collection consisted of asking participants for general predictions about their future life satisfaction immediately after entering self-employment, and then asking them again later on. Stutzer and his colleagues compared the initial statements with statements from the same individuals five years later. "We wanted to investigate the quality of their predictions and compare them with the actual realizations," says Alois Stutzer.

As social norms and perceptions of entrepreneurship are similar between Switzerland and Germany, these findings can also be extrapolated to Switzerland, the professor of political economics adds. "Although questions on current life satisfaction are standard in surveys like these, they rarely inquire about expected satisfaction," explains Stutzer, expanding on the merits of the data used.

Underestimating the workload

The research found that individuals who decided to become self-employed tended to overestimate their future life satisfaction. This holds even for successful entrepreneurs, who were still in business after five years. This means we cannot conclude that people who start off with an overly optimistic outlook misjudge the situation and are more likely to fail.

As Stutzer sees it, the reason for the discrepancy between expected and actual life satisfaction is that the newly self-employed initially place more weight on the positive aspects, such as the hoped-for higher income or increased autonomy. They do in fact report an increase in job satisfaction. However, at the same time, their leisure satisfaction drops.

In particular, the workload is oftentimes heavier than desired. The unexpectedly high workload inevitably affects other areas of their lives: "Maintaining social relationships also takes time, after all," says Alois Stutzer. "People often neglect to consider that side of things, whereas factors that are closely connected to the work itself are given greater weight." He therefore recommends not only drawing up a business plan, but a life plan also, and advises people to be conscious of what motives and goals make self-employment worth pursuing. "In decision-making models in general, expectations are important. Changing one’s mode of employment is a challenging decision."

Learning through unmet expectations

Does this mean that too many people become self-employed because they are overly optimistic? According to the researchers, the empirical framework of this study does not offer any simple indications either way. "Some of them probably would not have taken that step had their predictions been more realistic," says Stutzer. It is not possible to prove this, however.

The researchers speculate that individuals may learn from their unmet expectations. This would mean that next time they entered into an entrepreneurial venture their expectations would be more realistic. Or, they could be happier upon returning to paid employment, as they might value its advantages more, such as a secure income and regular working hours.

In addition, the individual perspective of the investigation does not take account of the effects of over-optimism on the innovations achieved and therefore on other employees, as well as on society: both successful and failed entrepreneurs could contribute to the development of new products and services, creating positive spillovers in society. "The individual’s engagement in self-employment might have been less beneficial for them personally than expected, but others can still profit from their work and build upon it," explains the economist.

Original publication

Reto Odermatt, Nattavudh Powdthavee, and Alois Stutzer (2021).
Are Newly Self-Employed Overly Optimistic About Their Future Well-Being? Journal of Behavioural and Experimental Economics, 95, 101779.