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Curb your enthusiasm: Optimistic entrepreneurs earn less

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  • de Meza, David
  • Dawson, Christopher
  • Henley, Andrew
  • Arabsheibani, G. Reza

Abstract

This paper concerns the implications of biased beliefs on entrepreneurial earnings. Amongst self-employed business owners, income is decreasing in optimism measured whilst still an employee. Controlling for earnings in paid employment, self-employment earnings of those with optimism above the mean are some 30% less than those with optimism below the mean. For employees, it is optimists that have higher earnings. These and associated results suggest that mistaken expectations lead to entry errors. As a test of external validity, future divorcees turn out to be financial optimists, indicating our measure captures an intrinsic psychological trait associated with rash decisions.

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  • de Meza, David & Dawson, Christopher & Henley, Andrew & Arabsheibani, G. Reza, 2019. "Curb your enthusiasm: Optimistic entrepreneurs earn less," European Economic Review, Elsevier, vol. 111(C), pages 53-69.
    • Handle: RePEc:eee:eecrev:v:111:y:2019:i:c:p:53-69
    DOI: 10.1016/j.euroecorev.2018.08.007
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    Cited by:

    1. Michele Dell'Era & Luca David Opromolla & Luís Santos‐Pinto, 2023. "Can optimism solve the entrepreneurial earnings puzzle?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(1), pages 139-169, January.
    2. Marco Caliendo & Alexander S. Kritikos & Daniel Rodríguez & Claudia Stier, 2023. "Self-efficacy and entrepreneurial performance of start-ups," Small Business Economics, Springer, vol. 61(3), pages 1027-1051, October.
    3. Sergio A. Contreras, 2019. "Self-Employment in Times of Crisis: The Case of the Spanish Financial Crisis," Economies, MDPI, vol. 7(3), pages 1-14, August.
    4. Guo, Shiqi & An, Jiafu, 2022. "Does terrorism make people pessimistic? Evidence from a natural experiment," Journal of Development Economics, Elsevier, vol. 155(C).
    5. Kritikos, Alexander, 2022. "Personality and Entrepreneurship," GLO Discussion Paper Series 1137, Global Labor Organization (GLO).
    6. Astebro, Thomas B. & Fossen, Frank M. & Gutierrez, Cédric, 2024. "Entrepreneurs: Clueless, Biased, Poor Heuristics, or Bayesian Machines?," HEC Research Papers Series 1529, HEC Paris.
    7. Aymeric Bellon & J. Anthony Cookson & Erik P. Gilje & Rawley Z. Heimer, 2020. "Personal Wealth and Self-Employment," NBER Working Papers 27452, National Bureau of Economic Research, Inc.
    8. Astebro, Thomas B. & Fossen, Frank M. & Gutierrez, Cédric, 2024. "Entrepreneurs: Clueless, Biased, Poor Heuristics, or Bayesian Machines?," HEC Research Papers Series 1529, HEC Paris.
    9. Byun, Sang-Eun & Han, Siyuan & Kim, Hyejeong & Centrallo, Carol, 2020. "US small retail businesses’ perception of competition: Looking through a lens of fear, confidence, or cooperation," Journal of Retailing and Consumer Services, Elsevier, vol. 52(C).
    10. Caliendo, Marco & Fossen, Frank M. & Kritikos, Alexander S., 2022. "Personality characteristics and the decision to hire," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 31(3), pages 736-761.

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    More about this item

    Keywords

    Financial optimism; expectations; entrepreneurs;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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