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"I Think I Can, I Think I Can": Overconfidence and Entrepreneurial Behavior

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Author Info
Philipp Köllinger
Maria Minniti
Christian Schade

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Abstract

Many firms fail shortly after inception. Yet individuals continue starting businesses. Prewar economists such as Keynes invoked animal spirits and stressed psychological factors in their explanations of economic behavior. Using a large sample obtained from surveys conducted in 18 countries, we study what variables have a significant impact on an individual's decision to start a business. We find strong evidence that subjective, and often biased, perceptions have a crucial impact on new business creation across all countries in our sample. Our findings are consistent with the idea that individuals rely significantly on their perceptions rather than on objective probabilities, evaluate their businesses prospects by taking an overconfident "inside view" of their situation, and, as a result, overestimate their likelihood of success.

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Publisher Info
Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 501.

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Length: 31 p.
Date of creation: 2005
Date of revision:
Publication status: Published in: Journal of Economic Psychology 28 (2007), Iss. 4, 502-527
Handle: RePEc:diw:diwwpp:dp501

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Related research
Keywords: Entrepreneurship; Self-employment; Perceptions; Perceptual variables; Overconfidence;

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Find related papers by JEL classification:
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
J29 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Other
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Antonio E. Bernardo & Ivo Welch, 2001. "On the Evolution of Overconfidence and Entrepreneurs," Cowles Foundation Discussion Papers 1307, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  2. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September. [Downloadable!]
  3. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  4. Richard H. Thaler, 2000. "From Homo Economicus to Homo Sapiens," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 133-141, Winter. [Downloadable!] (restricted)
  5. David G. Blanchflower, 2004. "Self-Employment: More may not be better," NBER Working Papers 10286, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Loewenstein, George & Thaler, Richard H, 1989. "Intertemporal Choice," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 181-93, Fall. [Downloadable!] (restricted)
  7. Jack, Sarah L. & Anderson, Alistair R., 2002. "The effects of embeddedness on the entrepreneurial process," Journal of Business Venturing, Elsevier, vol. 17(5), pages 467-487, September. [Downloadable!] (restricted)
  8. Cramer, J. S. & Hartog, J. & Jonker, N. & Van Praag, C. M., 2002. "Low risk aversion encourages the choice for entrepreneurship: an empirical test of a truism," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 29-36, May. [Downloadable!] (restricted)
  9. Erik Hoelzl & Aldo Rustichini, 2005. "Overconfident: Do You Put Your Money On It?," Economic Journal, Royal Economic Society, vol. 115(503), pages 305-318, 04. [Downloadable!] (restricted)
  10. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  11. Murat F. Iyigun & Ann L. Owen, 1997. "Risk, entrepreneurship and human capital accumulation," Finance and Economics Discussion Series 1997-37, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  12. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "Pattenrs Of Firm Entry And Exit In U.S. Manufacturing Industries," Papers 1-88-2, Pennsylvania State - Department of Economics.
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  13. Baumol, William J, 1990. "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 893-921, October. [Downloadable!] (restricted)
  14. David Colander & Richard Holt & Barkley Rosser, Jr, 2004. "The changing face of mainstream economics," Review of Political Economy, Taylor and Francis Journals, vol. 16(4), pages 485-499, October. [Downloadable!] (restricted)
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  15. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November. [Downloadable!] (restricted)
  16. Forlani, David & Mullins, John W., 2000. "Perceived risks and choices in entrepreneurs' new venture decisions," Journal of Business Venturing, Elsevier, vol. 15(4), pages 305-322, July. [Downloadable!] (restricted)
  17. Hvide, Hans K., 2002. "Pragmatic beliefs and overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 15-28, May. [Downloadable!] (restricted)
  18. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. repec:cup:cbooks:9780521465618 is not listed on IDEAS
  20. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January. [Downloadable!] (restricted)
  21. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June. [Downloadable!] (restricted)
  22. Blanchflower, David G & Oswald, Andrew J, 1998. "What Makes an Entrepreneur?," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 26-60, January. [Downloadable!] (restricted)
    Other versions:
  23. Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988. "Entrepreneurs' perceived chances for success," Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marco Caliendo & Frank Fossen & Alexander S. Kritikos, 2008. "The Impact of Risk Attitudes on Entrepreneurial Survival," Working Papers 012, Hanseatic University, Germany, Department of Economics. [Downloadable!]
    Other versions:
  2. Philipp Koellinger & Maria Minniti & Christian Schade, 2008. "Seeing the World with Different Eyes," Tinbergen Institute Discussion Papers 08-035/3, Tinbergen Institute. [Downloadable!]
  3. Robin Hogarth & Natalia Karelaia, 2008. "Entrepreneurial Success and Failure: Confidence and Fallible Judgement," Economics Working Papers 1130, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  4. Verheul, I. & Carree, M.A., 2008. "Overoptimism among Founders: The Role of Information and Motivation," Research Paper ERS-2008-008-ORG Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  5. Lee, Lena & Wong, Poh Kam & Foo, Maw Der, 2005. "Antecedents of Entrepreneurial Propensity: Findings from Singapore, Hong Kong and Taiwan," MPRA Paper 594, University Library of Munich, Germany, revised 10 Apr 2007. [Downloadable!]
  6. Sander Wennekers & Jolanda Hessels & Chantal Hartog, 2009. "Global Entrepreneurship Monitor 2008 The Netherlands," Scales Research Reports A200914, EIM Business and Policy Research. [Downloadable!]
    Other versions:
  7. Philipp Koellinger, 2008. "Why are some entrepreneurs more innovative than others?," Small Business Economics, Springer, vol. 31(1), pages 21-37, June. [Downloadable!] (restricted)
    Other versions:
  8. Marco Caliendo & Alexander S. Kritikos, 2008. "Start-Ups by the Unemployed: Characteristics, Survival and Direct Employment Effects," Working Papers 008, Hanseatic University, Germany, Department of Economics. [Downloadable!]
    Other versions:
  9. Philipp Köllinger & Maria Minniti, 2006. "Not for Lack of Trying: American Entrepreneurship in Black and White," Discussion Papers of DIW Berlin 574, DIW Berlin, German Institute for Economic Research. [Downloadable!]
    Other versions:
  10. Silvia Ardagna & Annamaria Lusardi, 2009. "Where does regulation hurt? Evidence from new businesses across countries," NBER Working Papers 14747, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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