Manage the unmanageable? The illusion of control of new venture teams coping with dynamic environmts

Abstract

Behavioral decision theory and the hubris theory of entrepreneurship suggest that entrepreneurs' uncertainty in dynamic environments leads to cognitive biases. Despite the elaborated theory, empirical evidence of the dynamism - bias relationship is scarce and has produced unexpected results. Further, the role that mechanisms applied to cope with environmental dynamism play in the emergence of cognitive biases, remains unclear. This study investigates how the interplay of environmental dynamism and environmental scanning relates to the illusion of control bias of new venture teams (NVTs). The NVT illusion of control describes an NVT’s tendency to systematically overestimate the degree to which their skills and performance, instead of chance, will influence uncontrollable events. We test our hypotheses by applying structural equation modeling with a sample of 123 NVTs in Germany. Our findings reveal a lack of direct relationship between environmental dynamism and NVT illusion of control but discover an indirect relationship between the two mediated by environmental scanning. These findings suggest that NVTs regularly overestimate their ability to manage their largely unmanageable environment when applying the coping mechanism of environmental scanning.