'Excess Entry, Ambiguity Seeking, and Competence: An Experimental Investigation'
UPF Economics and Business Working Paper 778
32 Pages Posted: 16 Nov 2005
Date Written: October 2004
Excess entry refers to the high failure rate of new entrepreneurial ventures. Economic explanations suggest 'hit and run' entrants and risk-seeking behavior. A psychological explanation is that people (entrepreneurs) are overconfident in their abilities (Camerer & Lovallo, 1999). Characterizing entry decisions as ambiguous gambles, we alternatively suggest-following Heath and Tversky (1991)-that people seek ambiguity when the source of uncertainty is related to their competence. Overconfidence, as such, plays no role. This hypothesis is confirmed in an experimental study that also documents the phenomenon of reference group neglect. Finally, we emphasize the utility that people gain from engaging in activities that contribute to a sense of competence. This is an important force in economic activity that deserves more explicit attention.
Keywords: C91, L10
JEL Classification: Competence, excess entry, entrepreneurship, overco
Suggested Citation: Suggested Citation