Tuesday, November 10, 2009

Does overconfidence led to more firms being started?

Two somewhat competing papers were recently posted on SSRN. The Hayward, Shaperd, and Griffin paper suggests that hubris (overcondi

SSRN-A Hubris Theory of Entrepreneurship by Mathew Hayward, Dean Shepherd, Dale Griffin:
"Although data from the U.S. Census Bureau's Business Information Tracking Series show that 60 percent of the businesses launched between 1989 and 1992 did not survive six years, founders overconfidently believe that they can beat the odds of failure. The hubris theory offered here incorporates three separate psychological processes: overconfidence in knowledge, overconfidence in prediction, and overconfidence in personal abilities. A detailed discussion of the hubris theory leads to a series of propositions. According to the first two propositions, founders are most overconfident when faced with highly complex,dynamic tasks related to the new venture. Another proposition suggests that experienced firm founders become more overconfident when launching a firm that differs from previous ventures..."
On the other hand, Lowe and Ziedonis find little support for this:
"Following a discussion of recent studies of university technology licensing to entrepreneurial firms and the literature on managerial cognitive bias, it is hypothesized that entrepreneurial startups are less likely than established firms to terminate development efforts and to commercialize inventions successfully. The last hypothesis proposes that inventions licensed by startups generate lower economic returns than do inventions licensed by established firms. Data on 734 inventions disclosed to the University of California from 1981to 1999 and licensed exclusively to a firm are used to test the hypotheses. The data indicate that startups actually generate greater levels of licensing revenues for similar technologies than do established firms. However,entrepreneurs appear to hold on longer to technologies that do not achieve commercial success. The latter finding suggests entrepreneurs may be in denial about the unpromising futures of these inventions. As a whole, the results offer little support for the idea that excessive optimism is a driving force in the decision to found a firm"

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