How does Optimism impact on Entrepreneurs’ Overconfidence?

Sergio Margarita (), Luisa Tibiletti () and Mariacristina Uberti ()
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Sergio Margarita: University of Torino, Italy, Italy
Luisa Tibiletti: Department Management, University of Torino, Italy, Italy
Mariacristina Uberti: University of Torino, Italy, Italy

International Journal of Business Research and Management (IJBRM), 2015, vol. 6, issue 3, 45-53

Abstract: Optimism and overconfidence are well documented cognitive biases in the entrepreneurship literature (see Shepherd et al., 2015). Although these sentiments are typically thought to be almost overlapped, empirical studies make evidence of their different construct (see Trevelyan, 2008, 2011). In the paper at hand we investigate the descriptive and normative motivations inducing misconfidence biases to arise. First, we introduce the definition of optimism as underestimation of the task difficulty to meet a strategic Key Performance Indicator (KPI). Second, we define overconfidence as the tendency to overestimate the probability to achieve an uncertain task. To calculate this probability we set up a prescriptive benchmarking-based model. Third, we spotlight situations in enterprise risk management (ERM) where misconfidence biases in judgment emerge. Complementing Bordley et al. (2015) and Tibiletti and Uberti (2015) results, we show that overconfidence arises in presence of two extreme circumstances: (1) underestimation of task difficulty coupled with extremely poor entrepreneurial projects, and (2) overestimation of task difficulty coupled with extremely good entrepreneurial projects. Our theoretical findings match with accounted biased behaviors recognized among entrepreneurs known as the escalation and de-escalation of commitment effect biases. The study is based on the normative foundation for overconfidence set up by Bordley et al. (2015) and casts light on which circumstances that occurs. Our results have also practical implications. In fact, it is important for entrepreneurs be aware of situations where self-confidence is normatively biased.

Keywords: Optimism and Overconfidence; Benchmarking Procedure; Escalation and Deescalation of Commitment; Regulatory Focus Theory; Strategic Key Performance Indicators. (search for similar items in EconPapers)
JEL-codes: M0 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:aml:intbrm:v:6:y:2015:i:3:p:45-53

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