Learning About the Unknown: How Fast Do Entrepreneurs Adjust Their Beliefs?

Abstract:     
The extent to which entrepreneurs adjust theirbeliefs in light of new information instead of relying on past experience ismeasured. Using data from 1999 and 2000 on 700 self-employed Britons collectedby the British Household Panel Survey, a model was created in whichentrepreneurs continually receive valuable but noisy market signals about thetrue but unobserved productivity of their efforts, and then use thisinformation to update their expectations of unobserved productivity. Results show that entrepreneurs do exploit new information, but they givemuch more weight to their previous beliefs when forming expectations. Youngerentrepreneurs were found to respond more sensitively to new information thandid older entrepreneurs. There were no differences found with respect to menversus women entrepreneurs, employers versus nonemployers, and experiencedversus less experienced entrepreneurs. Overall, the rate of exploitation of newinformation was found to be relatively modest. Government provision ofinformation, education, and training can be tailored to be more effective atimproving entrepreneurs' responsiveness than grants or subsidies wouldbe. (LKB)

Keywords: Firm productivity, Adaptability, Adoption of ideas, Information utilization, Learning, Beliefs, Experience

Accepted Paper Series