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

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  • Philipp Köllinger
  • Maria Minniti
  • Christian Schade

Abstract

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.

Suggested Citation

  • Philipp Köllinger & Maria Minniti & Christian Schade, 2005. ""I Think I Can, I Think I Can": Overconfidence and Entrepreneurial Behavior," Discussion Papers of DIW Berlin 501, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp501
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    More about this item

    Keywords

    Entrepreneurship; Self-employment; Perceptions; Perceptual variables; Overconfidence;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • J29 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Other
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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