Learning By Investing: Evidence from Venture Capital

42 Pages Posted: 13 Mar 2007 Last revised: 29 Oct 2014

See all articles by Morten Sorensen

Morten Sorensen

Dartmouth College - Tuck School of Business

Date Written: February 1, 2008

Abstract

Uncertainties about technologies and investment opportunities are prevalent for investments in entrepreneurial companies by venture capitalists (VCs), and this study finds that the resolution of these uncertainties, through VCs' learning, is important for their investment decisions. The hypothesis that individual investments are evaluated in isolation, as predicted by standard models, is clearly rejected. The empirical analysis is based on a dynamic learning model derived from the Multi-armed Bandit model. The results suggest that VCs learn from past investments (exploitation) but also consider the option value of future learning (exploration) when making investment decisions.

Keywords: Venture Capital, Learning, Multi-Armed Bandit Model, Exploration, Exploitation

JEL Classification: D49, D83, D92, G24, G31

Suggested Citation

Sørensen, Morten, Learning By Investing: Evidence from Venture Capital (February 1, 2008). AFA 2008 New Orleans Meetings Paper, Available at SSRN: https://ssrn.com/abstract=967822 or http://dx.doi.org/10.2139/ssrn.967822

Morten Sørensen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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