Overconfidence

Robert Paul Singh

doi:10.1108/neje-07-2019-0031

Abstract

PurposeThere has been significant growth in entrepreneurship research over the past several decades. Yet with all of the knowledge gained and presumably improved training of would-be entrepreneurs, firm failure rates remain persistently high. It is argued here that the historical and continued research focus on successful entrepreneurs has limited the field. Entrepreneurs are often considered to possess uniquely positive capabilities relative to the general population; this paper explores the possibility that the majority of entrepreneurs suffer from overconfidence and that this leads most entrepreneurs to make “bad bets” that result in underperformance and firm failure.Design/methodology/approachIn this paper, a qualitative review of the literature was performed.FindingsBased on the literature review, three formal propositions are developed. The first two suggest that the majority of entrepreneurs are overconfident in their personal capabilities and the prospects for their new ventures. It is then proposed that this overconfidence leads to errors in judgment that results in financial underperformance and failure found among most new ventures.Originality/valueThis paper makes an important contribution to the entrepreneurship literature by arguing that overconfidence negatively impacts pre-founding decision-making such that entrepreneurs pursue flawed opportunities. Studying the issues raised in this paper may spur new lines of research and knowledge that lead to better entrepreneurial outcomes.

Highlights

Entrepreneurship and new venture creation shape economies and advance societies (Schumpeter, 1934; Wennekers and Thurik, 1999). Schumpeter (1934) believed there is no more important economic actor than the entrepreneur
Concluding thoughts One would be hard pressed to identify another field of study or science which largely ignores more than half of the population subjects, and yet, that is where we stand after decades of effort to understand entrepreneurs and entrepreneurial processes
This paper makes an important contribution to the entrepreneurship and psychology literatures by proposing that a greater focus on failed entrepreneurs could yield important new knowledge

Summary

Introduction

Entrepreneurship and new venture creation shape economies and advance societies (Schumpeter, 1934; Wennekers and Thurik, 1999). Schumpeter (1934) believed there is no more important economic actor than the entrepreneur. Overconfident entrepreneurs tend to ignore the competition and the strengths of direct competitors (Moore and Cain, 2007), to introduce riskier products with lower success rates (Simon et al, 2000), to under-resource the venture, to engage less in legitimacy gaining activities and to rely less on external networks for relational resources (Hayward et al, 2006), all of which are considered critical for firm survival These are all issues that are likely a result of not fully understanding the markets they are entering. Overconfidence is a psychological attribute found within most entrepreneurs, and it is a significant cause of firm failure

Findings

Discussion

Limitations