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Entrepreneurial Success and Failure: Confidence and Fallible Judgement

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Author Info
Robin Hogarth ()
Natalia Karelaia
Abstract

Excess entry – or the high failure rate of market-entry decisions – is often attributed to overconfidence exhibited by entreprene urs. We show analytically that whereas excess entry is an inevitable consequence of imperfect assessments of entrepreneurial skill, it does not imply overconfidence. Judgmental fallibility leads to excess entry even when everyone is underconfident. Self-selection implies greater confidence (but not necessarily overconfidence) among those who start new businesses than those who do not and among successful entrants than failures. Our results question claims that “entrepreneurs are overconfident” and emphasize the need to understand the role of judgmental fallibility in producing economic outcomes.

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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1130.

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Date of creation: Dec 2008
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Handle: RePEc:upf:upfgen:1130

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Excess entry; fallible judgment; overconfidence; skill uncertainty; entrepreneurship; LeeX;

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups

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  1. Sarasvathy, D. K. & Simon, Herbert A. & Lave, Lester, 1998. "Perceiving and managing business risks: differences between entrepreneurs and bankers," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 207-225, January. [Downloadable!] (restricted)
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  5. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May. [Downloadable!] (restricted)
  6. Koellinger, Philipp & Minniti, Maria & Schade, Christian, 2007. ""I think I can, I think I can": Overconfidence and entrepreneurial behavior," Journal of Economic Psychology, Elsevier, vol. 28(4), pages 502-527, August. [Downloadable!] (restricted)
    Other versions:
  7. Palich, Leslie E. & Ray Bagby, D., 1995. "Using cognitive theory to explain entrepreneurial risk-taking: Challenging conventional wisdom," Journal of Business Venturing, Elsevier, vol. 10(6), pages 425-438, November. [Downloadable!] (restricted)
  8. Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988. "Entrepreneurs' perceived chances for success," Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108. [Downloadable!] (restricted)
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  11. Norton, William I, Jr & Moore, William T, 2002. " Entrepreneurial Risk: Have We Been Asking the Wrong Question?," Small Business Economics, Springer, vol. 18(4), pages 281-87, June. [Downloadable!] (restricted)
  12. Colin Camerer & Dan Lovallo, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March. [Downloadable!] (restricted)
  13. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June. [Downloadable!] (restricted)
  14. Dennis, William Jr., 1997. "More than you think: An inclusive estimate of business entries," Journal of Business Venturing, Elsevier, vol. 12(3), pages 175-196, May. [Downloadable!] (restricted)
  15. Duchesneau, Donald A. & Gartner, William B., 1990. "A profile of new venture success and failure in an emerging industry," Journal of Business Venturing, Elsevier, vol. 5(5), pages 297-312, September. [Downloadable!] (restricted)
  16. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December. [Downloadable!] (restricted)
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