Are Individuals Entering Self-Employment Overly-Optimistic? An Empirical Test of Plans and Projections on Nascent Entrepreneur Expectations

Abstract:     
This research examines the rationality of the expectations of nascent entrepreneurs. Consistent with conjectures regarding entry into self-employment, I find substantial over-optimism in nascent entrepreneurs' expectations in that they overestimate the probability that their nascent activity will result in an operating venture. Further, for those ventures that achieve operation, individuals overestimate the expected future sales and employment. To explain cross-sectional variations in over-optimism, I posit that those individuals who adopt an inside view to forecasting, through the use of plans and financial projections, will exhibit greater ex-ante bias in their expectations. Consistent with inside view adoption causing over-optimism in expectations, I find that the preparation of projected financial statements results in more overly-optimistic venture sale forecasts.

Keywords: expectations, information acquisition, forecasting, nascent entrepreneur, over-optimism, planning, rationality

JEL Classifications: D80, M13

Working Paper Series