Excess Entry and Entrepreneurial Decisions: The Role of Overconfidence

Philipp Koellinger, Maria Minniti and Christian Schade

in The Dynamics of Entrepreneurship

Published in print July 2011 | ISBN: 9780199580866
Published online September 2011 | e-ISBN: 9780191728716 | DOI:
Excess Entry and Entrepreneurial Decisions: The Role of Overconfidence

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Overconfidence is one of the most pervasive biases in human behavior and has been offered as an explanation for the high failure rates of start‐ups. Recent works, however, have shown that excess entry is possible even when individuals' are rational and exhibit confidence levels below average. Using a large balanced panel of GEM data aggregated by country for seventeen countries from 2001 to 2006 the study of this chapter finds overconfidence to have only very limited explanatory power and demonstrate the difficulty of capturing overconfidence unambiguously. The chapter also argues that, if at all present, overconfidence may be a desirable factor in some settings, both for individuals and at the aggregate level.

Keywords: entrepreneurship; heuristics; overconfidence; over‐optimism; behavioral biases; excess entry; GEM; failure rates

Chapter.  8455 words. 

Subjects: Innovation

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