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Entry Mistakes, Entrepreneurial Boldness and Optimism

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  • Brocas, Isabelle
  • Carrillo, Juan D
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    Abstract

    We analyze the investment decision of a population of time inconsistent entrepreneurs who overweight current payoffs relative to future returns. We show that, in order to avoid inefficient procrastination, agents may find it optimal to keep optimistic priors about their chances of success and 'blindly invest'. This explains entrepreneurial boldness and entry mistakes (or an excessive level of investment in the economy) without assuming the existence of boundedly rational, 'intrinsically optimistic' managers. We also prove that: (i) there is a negative correlation between the risk free rate and theproportion of bold entrepreneurs in the economy, (ii) realist and bold agents can coexist and achieve the same payoff and (iii) entrepreneurs with highest ability are most likely to keep optimistic prospects and make entry mistakes.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2213.

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    Date of creation: Aug 1999
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    Handle: RePEc:cpr:ceprdp:2213

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    Related research

    Keywords: Behavioural Finance; Boldness; Investment; Optimism; Time Inconsistency;

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    Cited by:
    1. Caillaud, B. & Jullien, B., 1999. "Modelling Time Inconsistent Preferences," Papers 99.521, Toulouse - GREMAQ.
    2. Aviad Heifetz & Yossi Spiegel, 2000. "On the Evolutionary Emergence of Optimism," Discussion Papers 1304, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Brocas, Isabelle & Carrillo, Juan D, 1999. "On Rush and Procrastination," CEPR Discussion Papers 2237, C.E.P.R. Discussion Papers.
    4. Battaglini, Marco & Benabou, Roland & Tirole, Jean, 2005. "Self-control in peer groups," Journal of Economic Theory, Elsevier, vol. 123(2), pages 105-134, August.
    5. Brocas, Isabelle & Carrillo, Juan D., 2000. "The value of information when preferences are dynamically inconsistent," European Economic Review, Elsevier, vol. 44(4-6), pages 1104-1115, May.

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