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"I Think I Can, I Think I Can": Overconfidence and Entrepreneurial Behavior

  • Philipp Köllinger
  • Maria Minniti
  • Christian Schade

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.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.43372.de/dp501.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 501.

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Length: 31 p.
Date of creation: 2005
Date of revision:
Handle: RePEc:diw:diwwpp:dp501
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