Entrepreneurial Under-Diversification: Over Optimism and Overconfidence

Enrico Maria Cervellati (), Pierpaolo Pattitoni and Marco Savioli
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Enrico Maria Cervellati: Department of Management, University of Bologna, Italy; Luiss Guido Carli, Italy

Working Paper series from Rimini Centre for Economic Analysis

Abstract: Our model wants to explain how overconfidence and over optimism lead entrepreneurs to overinvest in their companies, underestimating risks and overestimating expected returns. The entrepreneur has to choose which part of her wealth to invest in her private company and which one in the stock market. Overconfidence and over optimism are parameters in our model, and they bias the entrepreneur’s portfolio allocation. With a simulation analysis, we calculate overconfidence and over optimism levels implicit in the entrepreneurs' observable portfolio, instead of using proxies or indirect measures. Our explicit measure of entrepreneurial under-diversification could be used in empirical analyses.

Keywords: Behavioural Biases; Entrepreneurship; Portfolio Optimization; Simulation Analysis; Under-diversification (search for similar items in EconPapers)
JEL-codes: G02 G11 L26 (search for similar items in EconPapers)
Date: 2013-01, Revised 2016-05
New Economics Papers: this item is included in nep-cbe and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:09_13

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