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The Return to Independent Invention: Evidence of Unrealistic Optimism, Risk Seeking or Skewness Loving?

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  • Thomas Astebro

    (University of Waterloo)

Abstract

Examining a sample of 1,091 inventions I investigate the magnitude and distribution of the pretax internal rate of return (IRR) to inventive activity. The average IRR on a portfolio investment in these inventions is 11.4%. This is higher than the risk--free rate but lower than the long--run return on high--risk securities and the long--run return on early--stage venture capital funds. The portfolio IRR is significantly higher, for some ex ante identifiable classes of inventions. The distribution of return is skew: only between 7--9% reach the market. Of the 75 inventions that did, six realised returns above 1400%, 60% obtained negative returns and the median was negative. Copyright Royal Economic Society 2003.

Suggested Citation

  • Thomas Astebro, 2003. "The Return to Independent Invention: Evidence of Unrealistic Optimism, Risk Seeking or Skewness Loving?," Economic Journal, Royal Economic Society, vol. 113(484), pages 226-239, January.
  • Handle: RePEc:ecj:econjl:v:113:y:2003:i:484:p:226-239
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    References listed on IDEAS

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    Cited by:

    1. Ingrid Verheul & Martin Carree & Roy Thurik, 2009. "Allocation and productivity of time in new ventures of female and male entrepreneurs," Small Business Economics, Springer, vol. 33(3), pages 273-291, October.
    2. Meyer, Martin, 2006. "Are patenting scientists the better scholars?: An exploratory comparison of inventor-authors with their non-inventing peers in nano-science and technology," Research Policy, Elsevier, vol. 35(10), pages 1646-1662, December.
    3. Davis, Lee N. & Davis, Jerome & Hoisl, Karin, 2009. "What Inspires Leisure Time Invention?," Discussion Papers in Business Administration 10457, University of Munich, Munich School of Management.
    4. Baumol, William J., 2007. "On income distribution and growth," Journal of Policy Modeling, Elsevier, vol. 29(4), pages 545-548.
    5. repec:spr:scient:v:82:y:2010:i:1:d:10.1007_s11192-009-0029-7 is not listed on IDEAS
    6. Boyan Jovanovic & Balázs Szentes, 2013. "On the Market for Venture Capital," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 493-527.
    7. Tarnaud, Albane Christine & Leleu, Hervé, 2018. "Portfolio analysis with DEA: Prior to choosing a model," Omega, Elsevier, vol. 75(C), pages 57-76.
    8. Alberto Galasso & Timothy S. Simcoe, 2011. "CEO Overconfidence and Innovation," Management Science, INFORMS, vol. 57(8), pages 1469-1484, August.
    9. Bryson, Alex & Gomez, Rafael & Kretschmer, Tobias, 2005. "Catching a wave: the adoption of voice and high commitment workplace practices in Britain: 1984-1998," LSE Research Online Documents on Economics 19909, London School of Economics and Political Science, LSE Library.
    10. George Norman & Lynne Pepall & Dan Richards, 2016. "Sequential Product Innovation, Competition and Patent Policy," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 48(3), pages 289-306, May.
    11. Boyan Jovanovic & Balàzs Szentes, 2007. "On the Return to Venture Capital," NBER Working Papers 12874, National Bureau of Economic Research, Inc.
    12. Frank M. Fossen, 2012. "Risk Attitudes and Private Business Equity," Discussion Papers of DIW Berlin 1209, DIW Berlin, German Institute for Economic Research.
    13. Henry Manne, 2014. "Resurrecting the ghostly entrepreneur," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 27(3), pages 249-258, September.
    14. William Baumol, 2015. "Joseph Schumpeter: the long run, and the short," Journal of Evolutionary Economics, Springer, vol. 25(1), pages 37-43, January.
    15. Mata, José & Woerter, Martin, 2013. "Risky innovation: The impact of internal and external R&D strategies upon the distribution of returns," Research Policy, Elsevier, vol. 42(2), pages 495-501.
    16. William Baumol, 2010. "Some Significant Slips in Schumpeter’s Scenario," Chapters,in: Innovation, Economic Growth and the Firm, chapter 4 Edward Elgar Publishing.
    17. Akcigit, Ufuk & Grigsby, John & Nicholas, Tom, 2017. "The Rise of American Ingenuity: Innovation and Inventors of the Golden Age," CEPR Discussion Papers 11755, C.E.P.R. Discussion Papers.
    18. Alberto Galasso & Timothy S. Simcoe, 2010. "CEO Overconfidence and Innovation," NBER Working Papers 16041, National Bureau of Economic Research, Inc.
    19. Koellinger, Ph.D. & Treffers, T., 2012. "Joy leads to Overconfidence, and a Simple Remedy," ERIM Report Series Research in Management ERS-2012-001-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    20. Avinadav, Tal & Chernonog, Tatyana & Perlman, Yael, 2015. "The effect of risk sensitivity on a supply chain of mobile applications under a consignment contract with revenue sharing and quality investment," International Journal of Production Economics, Elsevier, vol. 168(C), pages 31-40.
    21. Gambardella, Alfonso, 2013. "The economic value of patented inventions: Thoughts and some open questions," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 626-633.
    22. Martin Koudstaal & Randolph Sloof & Mirjam van Praag, 2015. "Are Entrepreneurs more Optimistic and Overconfident than Managers and Employees?," Tinbergen Institute Discussion Papers 15-124/VII, Tinbergen Institute.
    23. Baumol William, 2011. "Innovation: Meager Private Gains, Enormous Social Gains," Entrepreneurship Research Journal, De Gruyter, vol. 1(4), pages 1-7, October.
    24. Cremers, Katrin, 2004. "Determinants of Patent Litigation in Germany," ZEW Discussion Papers 04-72, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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