Entry Mistakes, Entrepreneurial Boldness and Optimism

Isabelle Brocas and Juan D. Carrillo

No 2213, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze the investment decision of a population of time inconsistent entrepreneurs who overweight current payoffs relative to future returns. We show that, in order to avoid inefficient procrastination, agents may find it optimal to keep optimistic priors about their chances of success and 'blindly invest'. This explains entrepreneurial boldness and entry mistakes (or an excessive level of investment in the economy) without assuming the existence of boundedly rational, 'intrinsically optimistic' managers. We also prove that: (i) there is a negative correlation between the risk free rate and theproportion of bold entrepreneurs in the economy, (ii) realist and bold agents can coexist and achieve the same payoff and (iii) entrepreneurs with highest ability are most likely to keep optimistic prospects and make entry mistakes.

Keywords: Behavioural Finance; Boldness; Investment; Optimism; Time Inconsistency (search for similar items in EconPapers)
JEL-codes: A12 D81 D92 G39 (search for similar items in EconPapers)
Date: 1999-08
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Citations: View citations in EconPapers (10)

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