The Mental Trap: Why so Many Online Businesses Fail [Gianluca Cammarata – Eco 2]

Ever had a brilliant business idea? The golden one which will allow you to retire young and move to a small farm in Tuscany, vineyard and all?

Well, so have millions of other people. Statistics show that of those who have taken their idea to the next level (establishing an online business), over 90% have failed in their first 120 days. But if these ideas are so brilliant, why are so many online businesses failing, and why are so many people deciding to take their idea to the next level in the first place?

There are several factors which influence the decisions of new business owners. Bounded rationality limits the rationality of entrepreneurs, consequently leading them to make irrational decisions.

For example, one may encounter an online sale of potentially profitable goods, however the sale ends in 5 minutes, and thus the entrepreneur is faced with a decision and little time to deliberate it, hence impairing their ability to make an informed and rational resolve. Bounded rationality may also result in satisficing. Satisficing behaviour often leads entrepreneurs to make decisions that are ‘good enough’, and not to the maximum utility of their resources.

Another characteristic of behavioural economics plaguing many entrepreneurs is overconfidence.

Overconfidence tends to cause many to take greater risks, which of course can result in greater rewards. However, more commonly, such risks in the beginning of a small business often result in greater loss. Since these businesses are in their infant stages, all that’s required is a small setback to crush them for good.

But where does this overconfidence stem from? You would think that, considering these people are generally inexperienced, they would be more cautious?

Well, there is a possibility that many begin an online business with a lack of the necessary information regarding how to run a business in the first place. Physical stores consume far more resources and therefore greater time in the decision making process is used in order to make an informed and rational choice in regards to create that business or not, whereas all that is required to start an online business is a computer, or even simply a smartphone.

It goes without saying, however, that many looking to begin a business will have some sort of information. The lack of information received already hampers one’s chances of succeeding, but the tendency of people and their brain’s to interpret the little information it has into something they would like to hear (i.e. survivorship bias) can cause severe misjudgements and often misguide entrepreneurs.

Ultimately, it is relatively false and obscure information, and few of the many elements of behavioural economics, which prevent so many from succeeding as online entrepreneurs, and as entrepreneurs generally. What are your thoughts? What do you think is the main reason why so many online businesses start (and inevitably fail)? Share your thoughts in the comments section below!