On the Evolution of Overconfidence and Entrepreneurs

Posted: 28 Oct 2009

See all articles by Antonio E. Bernardo

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: 2001

Abstract

Considering that roughly 75 percent of new businesses fail within the first five years, it is difficult to account for entrepreneurs' irrationally overconfident behavior.One explanation is that overconfident entrepreneurs are less likely to imitate their peers and more likely to explore their environment.When groups compete and inferior groups disappear, groups with some entrepreneurial activity may gain enough of an evolutionary advantage to permit entrepreneurs to survive in equilibrium; in other words, groups with some overconfident individuals have an evolutionary advantage over groups without such individuals. A model illustrates the idea that overconfidence imposes only small costs on entrepreneurs (who put too much weight on their own information) but provides large benefits in revealing their private information to their groups.The presentation of the model is followed by a discussion of factors influencing the trade-off between the positive information externality and the high rate of entrepreneurial attrition.This trade-off results in an optimal proportion of entrepreneurs and depends on the size of the group, the degree of overconfidence, and the accuracy of individuals' private information. What follows is a discussion of the trade-off between intergroup and intragroup selection, as well as arguments pro and con group selection.One alternative explanation for overconfidence exists: when trying to deceive others that they are of higher ability, individuals' credibility is enhanced if they are themselves convinced of this ability.(SAA)

Keywords: Theoretical, Overconfidence, Self-efficacy, Management decisions, Startups, Groups, Risk orientation, Survival rates

Suggested Citation

Bernardo, Antonio E. and Welch, Ivo, On the Evolution of Overconfidence and Entrepreneurs (2001). Journal of Economics & Management Strategy, Vol. 10, Issue 3, p. 301-330 2001. Available at SSRN: https://ssrn.com/abstract=1495497

Antonio E. Bernardo (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2198 (Phone)
310-206-5455 (Fax)

Ivo Welch

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,035
PlumX Metrics