Entrepreneurial Under-Diversification: Over Optimism and Overconfidence
AbstractPast research shows that entrepreneurs often invest a large share of their personal wealth in their company, exposing themselves to idiosyncratic risk. In this paper, we focus on a possible explanation for this costly exposure, based on two behavioral biases: overconfidence and over optimism. Both these biases affect the very main variables of the risk-return analysis à la Markowitz. In particular, we find that if entrepreneurs perceive their private company to have a lower risk and a higher return than actual, they may overweight the company in their investment portfolios.
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Bibliographic InfoPaper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 09_13.
Date of creation: Jan 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
- NEP-CBE-2013-02-16 (Cognitive & Behavioural Economics)
- NEP-ENT-2013-02-16 (Entrepreneurship)
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