"I think I can, I think I can": Overconfidence and entrepreneurial behavior
Many firms fail shortly after inception. Yet individuals continue starting businesses. Prewar economists such as Keynes invoked animal spirits and stressed psychological factors in their explanations of economic behavior. Using a large sample obtained from surveys conducted in 18 countries, we study what variables have a significant impact on an individual's decision to start a business. We find strong evidence that subjective, and often biased, perceptions have a crucial impact on new business creation across all countries in our sample. Our findings are consistent with the idea that individuals rely significantly on their perceptions rather than on objective probabilities, evaluate their businesses prospects by taking an overconfident "inside view" of their situation, and, as a result, overestimate their likelihood of success.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Colander & Ric Holt & Barkley Rosser, 2003.
"The Changing Face of Mainstream Economics,"
Middlebury College Working Paper Series
0327, Middlebury College, Department of Economics.
- Davidsson, Per & Wiklund, Johan, 1997. "Values, beliefs and regional variations in new firm formation rates," Journal of Economic Psychology, Elsevier, vol. 18(2-3), pages 179-199, April.
- Murat F. Iyigun & Ann L. Owen, 1997.
"Risk, entrepreneurship and human capital accumulation,"
Finance and Economics Discussion Series
1997-37, Board of Governors of the Federal Reserve System (U.S.).
- Iyigun, Murat F & Owen, Ann L, 1998. "Risk, Entrepreneurship, and Human-Capital Accumulation," American Economic Review, American Economic Association, vol. 88(2), pages 454-57, May.
- Antonio E. Bernardo & Ivo Welch, 2001.
"On the Evolution of Overconfidence and Entrepreneurs,"
Journal of Economics & Management Strategy,
Wiley Blackwell, vol. 10(3), pages 301-330, 09.
- Antonio Bernardo & Ivo Welch, 2001. "On the Evolution of Overconfidence and Entrepreneurs," Yale School of Management Working Papers ysm211, Yale School of Management, revised 01 Nov 2003.
- Antonio E. Bernardo & Ivo Welch, 2001. "On the Evolution of Overconfidence and Entrepreneurs," Cowles Foundation Discussion Papers 1307, Cowles Foundation for Research in Economics, Yale University.
- Bernardo, Antonio & Welch, Ivo, 1997. "On the Evolution of Overconfidence and Entrepreneurs," University of California at Los Angeles, Anderson Graduate School of Management qt6668s4pz, Anderson Graduate School of Management, UCLA.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
- Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
- Loewenstein, George & Thaler, Richard H, 1989. "Intertemporal Choice," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 181-93, Fall.
- Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
- Dunne, T. & Roberts, M.J. & Samuelson, L., 1988.
"Pattenrs Of Firm Entry And Exit In U.S. Manufacturing Industries,"
1-88-2, Pennsylvania State - Department of Economics.
- Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
- Erik Hoelzl & Aldo Rustichini, 2005. "Overconfident: Do You Put Your Money On It?," Economic Journal, Royal Economic Society, vol. 115(503), pages 305-318, 04.
- Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
- Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
- Elke U. Weber & Richard A. Milliman, 1997. "Perceived Risk Attitudes: Relating Risk Perception to Risky Choice," Management Science, INFORMS, vol. 43(2), pages 123-144, February.
- J. A. Hausman, 1976.
"Specification Tests in Econometrics,"
185, Massachusetts Institute of Technology (MIT), Department of Economics.
- Cramer, J. S. & Hartog, J. & Jonker, N. & Van Praag, C. M., 2002. "Low risk aversion encourages the choice for entrepreneurship: an empirical test of a truism," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 29-36, May.
- Swamy, P A V B & Arora, S S, 1972. "The Exact Finite Sample Properties of the Estimators of Coefficients in the Error Components Regression Models," Econometrica, Econometric Society, vol. 40(2), pages 261-75, March.
- White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
- J. Barkley Rosser, Jr., 2001. "Alternative Keynesian and Post Keynesian Perspectives on Uncertainty and Expectations," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 23(4), pages 545-566, July.
- Richard H. Thaler, 2000. "From Homo Economicus to Homo Sapiens," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 133-141, Winter.
- Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May.
- Minniti, Maria, 2005. "Entrepreneurship and network externalities," Journal of Economic Behavior & Organization, Elsevier, vol. 57(1), pages 1-27, May.
- Busenitz, Lowell W. & Barney, Jay B., 1997. "Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making," Journal of Business Venturing, Elsevier, vol. 12(1), pages 9-30, January.
- Brian Wu & Anne Marie Knott, 2006. "Entrepreneurial Risk and Market Entry," Management Science, INFORMS, vol. 52(9), pages 1315-1330, September.
- Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
- Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
- David G. Blanchflower, 2004. "Self-Employment: More may not be better," NBER Working Papers 10286, National Bureau of Economic Research, Inc.
- Levesque, Moren & Minniti, Maria, 2006. "The effect of aging on entrepreneurial behavior," Journal of Business Venturing, Elsevier, vol. 21(2), pages 177-194, March.
- Jack, Sarah L. & Anderson, Alistair R., 2002. "The effects of embeddedness on the entrepreneurial process," Journal of Business Venturing, Elsevier, vol. 17(5), pages 467-487, September.
- Baldwin,John R. & Gorecki,Paul, 1995.
"The Dynamics of Industrial Competition,"
Cambridge University Press, number 9780521465618, June.
- Blanchflower, D.G. & Oswald, A., 1991.
"What Makes an Entrepreneur?,"
Economics Series Working Papers
99125, University of Oxford, Department of Economics.
- Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
- Baumol, William J, 1990. "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 893-921, October.
- Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
- 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.
- Baltagi, Badi H. & Chang, Young-Jae, 1994. "Incomplete panels : A comparative study of alternative estimators for the unbalanced one-way error component regression model," Journal of Econometrics, Elsevier, vol. 62(2), pages 67-89, June.
- Forlani, David & Mullins, John W., 2000. "Perceived risks and choices in entrepreneurs' new venture decisions," Journal of Business Venturing, Elsevier, vol. 15(4), pages 305-322, July.
When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:28:y:2007:i:4:p:502-527. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.