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The Effects of Experience on Entrepreneurial Optimism and Uncertainty

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  • STUART FRASER
  • FRANCIS J. GREENE

Abstract

This paper develops an occupational choice model in which entrepreneurs, who are initially uncertain about their true talent, learn from experience. As a consequence, both optimistic bias in talent beliefs and uncertainty diminish with experience. The model gives rise naturally to a heteroscedastic probit estimator of occupational choices, in contrast to the commonly used homoscedastic estimator. The model is applied to British data on self‐employment and optimism for the period 1984–99. The empirical analysis supports the main propositions of the model: principally, entrepreneurs are found to be more optimistic than employees, and both optimism and uncertainty diminish with experience.

Suggested Citation

  • Stuart Fraser & Francis J. Greene, 2006. "The Effects of Experience on Entrepreneurial Optimism and Uncertainty," Economica, London School of Economics and Political Science, vol. 73(290), pages 169-192, May.
    • Handle: RePEc:bla:econom:v:73:y:2006:i:290:p:169-192
    DOI: 10.1111/j.1468-0335.2006.00488.x
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    References listed on IDEAS

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    1. Vasilev, Aleksandar & Maksumov, Rashid, 2010. "Critical analysis of Chapter 23 of Keynes’s Notes on Mercantilism in The General Theory of Employment, Interest and Money (1936)," EconStor Research Reports 155318, ZBW - Leibniz Information Centre for Economics.
    2. Paul Baker, 1993. "Taxpayer compliance of the self-employed: estimates from household spending data," IFS Working Papers W93/14, Institute for Fiscal Studies.
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