'Excess Entry, Ambiguity Seeking, and Competence: An Experimental Investigation'

UPF Economics and Business Working Paper 778

32 Pages Posted: 16 Nov 2005

See all articles by Robin M. Hogarth

Robin M. Hogarth

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Daniela Grieco

University of Verona - Department of Economics; Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS)

Date Written: October 2004

Abstract

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

Hogarth, Robin M. and Grieco, Daniela, 'Excess Entry, Ambiguity Seeking, and Competence: An Experimental Investigation' (October 2004). UPF Economics and Business Working Paper 778, Available at SSRN: https://ssrn.com/abstract=848625 or http://dx.doi.org/10.2139/ssrn.848625

Robin M. Hogarth (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
34 93 542 2561 (Phone)
34 93 542 1746 (Fax)

Daniela Grieco

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS)

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

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