Vicarious Learning, Undersampling of Failure, and the Myths of Management
Organization Science
Two Faces of Search: Alternative Generation and Alternative Evaluation
Organization Science
A Hubris Theory of Entrepreneurship
Management Science
Overoptimism and the Performance of Entrepreneurial Firms
Management Science
Entrepreneurial Risk and Market Entry
Management Science
What Competition? Myopic Self-Focus in Market-Entry Decisions
Organization Science
Hindsight Bias, Risk Perception, and Investment Performance
Management Science
Entrepreneurial Optimism in the Market for Technological Inventions
Organization Science
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Excess entry—or the high failure rate of market entry decisions—is often attributed to overconfidence exhibited by entrepreneurs. Assuming that these decisions depend on assessments of business opportunities, we model boundedly rational entrepreneurs and show analytically that, whereas excess entry is an inevitable consequence of imperfect judgment, it does not necessarily imply overconfidence. Indeed, judgmental fallibility can lead to excess entry even when all potential entrepreneurs are underconfident. We further demonstrate that, as a group, individuals who decide to start a new business exhibit more confidence than those who do not and that successful entrants are less confident than failures. Our results therefore question general claims that overconfidence leads to excess entry. We conclude by emphasizing the need to understand the role of judgmental fallibility in producing economic outcomes and implications for both venture capitalists and the training of entrepreneurs.