Entrepreneurial Success and Failure: Confidence and Fallible Judgment

Robin Hogarth () and Natalia Karelaia ()
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Natalia Karelaia: INSEAD, 77305 Fontainebleau, France

Organization Science, 2012, vol. 23, issue 6, 1733-1747

Abstract: Excess entry—or the high failure rate of market entry decisions—is often attributed to overconfidence exhibited by entrepreneurs. Assuming that these decisions depend on assessments of business opportunities, we model boundedly rational entrepreneurs and show analytically that, whereas excess entry is an inevitable consequence of imperfect judgment, it does not necessarily imply overconfidence. Indeed, judgmental fallibility can lead to excess entry even when all potential entrepreneurs are underconfident. We further demonstrate that, as a group, individuals who decide to start a new business exhibit more confidence than those who do not and that successful entrants are less confident than failures. Our results therefore question general claims that overconfidence leads to excess entry. We conclude by emphasizing the need to understand the role of judgmental fallibility in producing economic outcomes and implications for both venture capitalists and the training of entrepreneurs.

Keywords: excess entry; fallible judgment; overconfidence; bounded rationality; entrepreneurship (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (36)

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http://dx.doi.org/10.1287/orsc.1110.0702 (application/pdf)

Related works:
Working Paper: Entrepreneurial success and failure: Confidence and fallible judgement (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ororsc:v:23:y:2012:i:6:p:1733-1747

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