When my clients ask me “what is the biggest obstacle founders face?”, I always give them one-word answer “overconfidence”. In my experience, un-grounded intuition and overconfident beliefs have often been the root of poor decision making. Thus, it is important to differentiate overconfidence from a healthy dose of self-confidence, after all it is the primary driver behind a person’s decision to dive into the murky waters of entrepreneurship.

Let me turn your attention to a past but important fact:

In 2006, nearly 650,000 new businesses with employees opened their doors in the United States, while nearly 565,000 firms closed, according to the U. S. Small Business Administration. More than 99 percent of the nearly 27 million businesses in the U.S. in 2006 were small firms with fewer than 500 employees.

The capacity of our mind is bounded. We tend to focus on very narrow slices of information and ignore massive amounts. We imagine that reality is simple, that we can reasonably forecast the future, and we become overconfident as result. In short, we fail to appreciate how much we do not know — how much uncertainty we should have. Further, we tend look for evidence supporting what we already believe; consequently, we become more overconfident. We fail to appreciate that our beliefs just might be false, that we are fallible.

Unfortunately, we don’t seem to learn very well from experience. We regularly need to remind entrepreneurs not to ignore the role of chance and randomness in events. Our mind is constantly trying to make sense of things – and it has a great liability to do so, even when there is nothing to be made sense of (except randomness). And, as you read these words, their truth will seem obvious – because you cannot imagine fully not knowing what you know now. In hindsight, everything is obvious, including this point. Since everything becomes clear to us and we forget what we did not know, the cycle feeds itself and we become even more overconfident.

However, if we can recognize that we are surrounded in time by massive uncertainties, then we are least on the right path. Acknowledging that we are fallible and tend become overconfident is itself incompatible with overconfidence. We should keep in mind that we are not as clever as we had imagined we were back when we were less clever. We should use the tools that we have at our disposal (e. g. statistics, experimentation, our capacity to reason in a rigorous way), and avoid making decisions based on un-grounded intuition and overconfident beliefs.