Overoptimism among Founders: The Role of Information and Motivation

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Overoptimism among Founders: The Role of Information and Motivation

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Overoptimism among Founders: The Role of Information and Motivation

03 Mar 2008-ERIM report series research in management Erasmus Research Institute of Management (Erasmus Research Institute of Management)-pp 3-26

TL;DR: The authors empirically investigated factors that influence overoptimism across nascent entrepreneurs and found that entrepreneurs who have relevant business information are more realistic and that entrepreneurs with a high level of general knowledge, acquired through education or previous (unrelated) entrepreneurial experience are more overoptimistic.

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Abstract: textThis study empirically investigates factors that influence overoptimism across nascent entrepreneurs. We distinguish between two main groups of determinants (information, motivation) and three types of overoptimism (income, psychological burden, leisure time). Findings indicate that entrepreneurs who have relevant business information are more realistic and that entrepreneurs with a high level of general knowledge, acquired through education or previous (unrelated) entrepreneurial experience, are more overoptimistic. External advice and business planning do not appear to limit subsequent overoptimism. Entrepreneurs are less overoptimistic about the pecuniary or non-pecuniary benefits of self-employment when these benefits are closely related to the initial motivation for starting up the business.

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Posted Content•

Inventor Perseverance after Being Told to Quit: The Role of Cognitive Biases

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Thomas B. Astebro, Scott A. Jeffrey, Gordon K. Adomdza

02 Jan 2007-Research Papers in Economics

TL;DR: This paper found that inventors are more overconfident and optimistic than the general population and optimism and past expenditures increased perseverance after being told to quit, while overconfidence in judgment ability had no effect.

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Abstract: We find that approximately one third (29%) of independent inventors continue to spend money and 51% continue to spend time on projects after receiving highly diagnostic advice to cease effort. Using survey data from actual inventors, this paper studies the role of overconfidence, optimism, and the sunk-cost bias in these decisions. We find that inventors are more overconfident and optimistic than the general population. We also find that optimism and past expenditures increased perseverance after being told to quit, while overconfidence in judgment ability had no effect. After being told to quit, optimists spend 166% more than pessimists and those having already spent, for example, $10 000 spend another $10 000.

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144 citations

Journal Article•DOI•

What can education bring to entrepreneurship? Formal versus non-formal education

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Stojan Debarliev¹, Aleksandra Janeska-Iliev¹, Osvaldas Stripeikis², Blaž Zupan³•Institutions (3)

Saints Cyril and Methodius University of Skopje¹, Vytautas Magnus University², University of Ljubljana³

02 Mar 2020-Journal of Small Business Management

TL;DR: In this article, the effect of formal versus non-formal entrepreneurship is examined by examining the effects of human capital on the performance of the two types of entrepreneurship. But, the authors focus on the non-traditional entrepreneurship field.

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Abstract: Building on a dynamic view of human capital for the entrepreneurship field, our article covers research performed in this field by examining: the effect of formal versus non-formal Entrepreneurial ...

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32 citations

Journal Article•DOI•

Antecedents of entrepreneurial intention: Evidence from Republic of Macedonia

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Stojan Debarliev, Aleksandra Janeska-Iliev, Tihona Bozhinovska, Viktorija Ilieva

16 Oct 2015-Business and Economic Horizons

TL;DR: In this paper, the authors examined the effect of the three motivational factors/the intention antecedents proposed in the theory of planed behavior (abbreviated TPB): personal attitude, subjective norm and perceived behavioral control, including a control group of variables on the entrepreneurial intention in specific economic and cultural settings, in our case in the Republic of Macedonia.

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Abstract: This study is designed to examine the effect of the three motivational factors/the intention antecedents proposed in the theory of planed behavior (abbreviated TPB): personal attitude, subjective norm and perceived behavioral control, including a control group of variables on the entrepreneurial intention in the specific economic and cultural settings, in our case in the Republic of Macedonia. The research includes 440 respondents. In order to test the hypotheses the data was examined using hierarchical regression. The applicability of the TPB in the context of entrepreneurship has received empirical support in this study, as well. The three independent variables: personal attitude, subjective norm and perceived behavioral control have a positive impact on entrepreneurial intention. On the other hand, results only partially support the influence of the control group of variables.

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15 citations

Cites background from "Overoptimism among Founders: The Ro..."

...Hence, well-educated nascent entrepreneurs may be more likely to overestimate their abilities to run a venture than entrepreneurs with lower levels of education (Verheul and Carree, 2008)....
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Journal Article•DOI•

"Yes, we know!" (Over)confidence in general knowledge among Austrian entrepreneurs.

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Viktorija Ilieva¹, Thomas Brudermann², Ljubomir Drakulevski¹•Institutions (2)

Saints Cyril and Methodius University of Skopje¹, University of Graz²

08 May 2018-PLOS ONE

TL;DR: Investigating the overconfidence bias in a sample of 92 Austrian entrepreneurs, who responded to a general-knowledge questionnaire, confirmed that entrepreneurs are indeed prone to expressing overprecision, a type of overconfidence, but not when answering questions of all levels of difficulty.

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Abstract: Overconfidence has been reported to be a common bias among entrepreneurs and might be one cause of the high failure rates observed for new ventures. In this study, we investigate the overconfidence bias in a sample of 92 Austrian entrepreneurs, who responded to a general-knowledge questionnaire. Their levels of overconfidence were assessed by their responses to hard, medium and easy knowledge questions, and the relations of individual, organizational and environmental factors to the bias score were analyzed. The results confirmed that entrepreneurs are indeed prone to expressing overprecision, a type of overconfidence, but not when answering questions of all levels of difficulty. Being a single founder instead of a co-founder was identified as a significant predictor of overconfidence. Confidence, on the other hand, was associated with age and prior entrepreneurial experience, while accuracy was determined solely by age. The results of this study only partly agree with those of previous studies conducted in different national and cultural settings.

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12 citations

Cites background from "Overoptimism among Founders: The Ro..."

...Some of the ways to measure overoptimism include asking respondents if the outcomes of a new-venture creation are in accordance with what they expected at the beginning [19] or, with reference to comparative overoptimism, asking them to rank the odds that they will achieve success in their business as well as for any other business like theirs [18]....
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...Factors that have been most often linked to entrepreneurial overconfidence, irrespective of its form, include: age [6,26,27], education [11,12,19], entrepreneurial experience [12,18,25], “Yes, we know!” (Over)confidence in general knowledge among Austrian entrepreneurs...
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...firm age [27], ownership structure [11,19], external investments [27,28], innovative activity [13,17,20,29] and environmental dynamism [6,19,20,25]....
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...[19] took a distinct approach when describing the role of education in entrepreneurial calibration: they differentiated between a general knowledge which positively relates to overoptimism and specific knowledge which leads to a reduction in overoptimism....
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...Regarding overoptimism, asking for outside help and not preferring to do everything alone have negative impacts [19]....
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Dissertation•

Effect of Behavioral Biases on Ranking of Financing Decisions by Financial Managers of Firms Listed In the Nairobi Securities Exchange

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Judith B.K. Nyakundi

01 Jan 2017

TL;DR: Dissertation Report Submitted to the Chandaria School of Business in Partial Fulfilment of the Requirement for the Degree of Doctor of Business Administration (DBA).

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Abstract: Dissertation Report Submitted to the Chandaria School of Business in Partial Fulfilment of the Requirement for the Degree of Doctor of Business Administration (DBA)

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11 citations

References

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Book•

Judgment Under Uncertainty: Heuristics and Biases

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Amos Tversky¹, Daniel Kahneman¹•Institutions (1)

Hebrew University of Jerusalem¹

01 Jan 1974

TL;DR: The authors described three heuristics that are employed in making judgements under uncertainty: representativeness, availability of instances or scenarios, and adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available.

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Abstract: This article described three heuristics that are employed in making judgements under uncertainty: (i) representativeness, which is usually employed when people are asked to judge the probability that an object or event A belongs to class or process B; (ii) availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a class or the plausibility of a particular development; and (iii) adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available. These heuristics are highly economical and usually effective, but they lead to systematic and predictable errors. A better understanding of these heuristics and of the biases to which they lead could improve judgements and decisions in situations of uncertainty.

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31,082 citations

Journal Article•DOI•

Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment

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Brad M. Barber¹, Terrance Odean²•Institutions (2)

University of California, Davis¹, University of California, Berkeley²

01 Nov 1998-Social Science Research Network

TL;DR: For example, this paper found that men trade 45 percent more than women and earn annual risk-adjusted net returns that are 1.4 percent less than those earned by women, while women perform worse than men.

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Abstract: Theoretical models of financial markets built on the assumption that some investors are overconfident yield one central prediction: overconfident investors will trade too much. We test this prediction by partitioning investors on the basis of a variable that provides a natural proxy for overconfidence--gender. Psychological research has established that men are more prone to overconfidence than women. Thus, models of investor overconfidence predict that men will trade more and perform worse than women. Using account data for over 35,000 households from a large discount brokerage firm, we analyze the common stock investments of men and women from February 1991 through January 1997. Consistent with the predictions of the overconfidence models, we document that men trade 45 percent more than women and earn annual risk-adjusted net returns that are 1.4 percent less than those earned by women. These differences are more pronounced between single men and single women; single men trade 67 percent more than single women and earn annual risk-adjusted net returns that are 2.3 percent less than those earned by single women.

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3,803 citations

"Overoptimism among Founders: The Ro..." refers background in this paper

...Barber and Odean (2001) look at the trading volume of investors as an indication of their overoptimism....
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...Overoptimism or overconfidence(1) has been found to play a role in different decisionmaking situations and professions (Lowe and Ziedonis, 2006; Barber and Odean, 2001)....
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...Overoptimism or overconfidence1 has been found to play a role in different decisionmaking situations and professions (Lowe and Ziedonis, 2006; Barber and Odean, 2001)....
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...Barber and Odean (2001) find that women trade less than men do, suggesting a link between gender and overoptimism7....
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Book Chapter•

The role of social and human capital among nascent entrepreneurs

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Per Davidsson¹, Benson Honig¹•Institutions (1)

Jönköping University¹

01 May 2003

TL;DR: In this article, the authors examined the developmental process of nascent entrepreneurs for 18 months and found that bridging and bonding social capital, consisting of both strong and weak ties, was a robust predictor for nascent entrepreneurs and advancing through the start-up process.

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Abstract: This study examines nascent entrepreneurship by comparing individuals engaged in nascent activities (n=380) with a control group (n=608), after screening a sample from the general population (n=30,427). The study then follows the developmental process of nascent entrepreneurs for 18 months. Bridging and bonding social capital, consisting of both strong and weak ties, was a robust predictor for nascent entrepreneurs, as well as for advancing through the start-up process. With regard to outcomes like first sale or showing a profit, only one aspect of social capital, viz. being a member of a business network, had a statistically significant positive effect. The study supports human capital in predicting entry into nascent entrepreneurship, but only weakly for carrying the start-up process towards successful completion.

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3,414 citations

"Overoptimism among Founders: The Ro..." refers background in this paper

...Individuals with higher levels of education tend to be more self-confident (Davidsson and Honig, 2003), and as a result may have relatively high expectations of the results of their work efforts....
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Journal Article•DOI•

Overall job satisfaction: how good are single-item measures?

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John P. Wanous¹, Arnon E. Reichers, Michael J. Hudy•Institutions (1)

Max M. Fisher College of Business¹

01 Apr 1997-Journal of Applied Psychology

TL;DR: A meta-analysis of single-item measures ofOverall job satisfaction found an average uncorrected correlation of .63 (SD = .09) with scale measures of overall job satisfaction, which is slightly lower than the overall mean correlation.

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Abstract: A meta-analysis of single-item measures of overall job satisfaction (28 correlations from 17 studies with 7,682 people) found an average uncorrected correlation of .63 (SD = .09) with scale measures of overall job satisfaction. The overall mean correlation (corrected only for reliability) is .67 (SD = .08), and it is moderated by the type of measurement scale used. The mean corrected correlation for the best group of scale measures (8 correlations, 1,735 people) is .72 (SD = .05). The correction for attenuation formula was used to estimate the minimum level of reliability for a single-item measure. These estimates range from .45 to .69, depending on the assumptions made.

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2,986 citations

Additional excerpts

...Similar measures of self-reported satisfaction have been applied in the areas of customer satisfaction (Peterson and Wilson, 1992) and job satisfaction (Wanous et al., 1997)....
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Journal Article•DOI•

Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making

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Lowell W. Busenitz¹, Jay B. Barney²•Institutions (2)

University of Houston¹, Ohio State University²

01 Jan 1997-Journal of Business Venturing

TL;DR: The authors examined differences between entrepreneurs and managers in large organizations with respect to two biases and heuristics: overconfidence (overestimating the probability of being right) and representativeness (the tendency to overgeneralize from a few characteristics or observations).

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2,505 citations

"Overoptimism among Founders: The Ro..." refers background or methods in this paper

...Others have reasoned that decision biases can be corrected through training (Fong and Nisbett, 1991; Busenitz and Barney, 1997, p. 24)....
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..., developing the new venture before all relevant information is available and known (Busenitz and Barney, 1997)(2)....
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...3 timely actions, e.g., developing the new venture before all relevant information is available and known (Busenitz and Barney, 1997)2....
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...The calibration procedure has been widely cited and has been applied in the area of entrepreneurship by for example Busenitz and Barney (1997) and Forbes (2005)....
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...Situations in which entrepreneurs are confronted with high levels of environmental uncertainty often demand high levels of knowledge, forcing entrepreneurs to rely on heuristics to make decisions (Busenitz and Barney, 1997, p. 10)....
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