UNDERSTANDING ENTREPRENEURSHIP: IMPACT OF OVERCONFIDENCE ON ENTREPRENEURSHIP

International Journal of Technical Research & Application
International Journal of Technical Research & ApplicationInternational Journal of Technical Research & Application

Economic life is full of uncertainties and only thing that is certain here is that most of it is conducted into the dynamic environment; this brings a question in point though: Why individuals opt for entrepreneurship that involves a good amount of risk, and where there are little or no returns? There are ample research data available to show people are more optimistic when decision is taken under uncertainty and even show overconfidence in the judgement. The relative ability is often overestimated by the overconfident individuals and so probabilistically, their perceptions for their actions seem to be safer to them in comparison to those who show no overconfidence. Interesting findings are shown in the sample of 2,944 entrepreneurs there are as many as 81% people who feel their chances of obtaining success are at least 70%, there are 33% other people with a belief that the probability of 100% exists in terms of their chances of success. The truth is that, as many as 75% new businesses fail to exist after 5 years. Here arises a question that, are the entrepreneurs not in a position to see the risk, or do they carry a different perception of the risk involved in their acts? Going through a recent study, it is clear that the entrepreneurs are very much cautious (even more than what we think) and the opinion that entrepreneurs have more tolerance for risk is considered wrong in the findings. There are few cases though, where entrepreneurs seem to bear less risk than normal, still it does not stop them to take risk. Some people find these findings controversial, but the truth is that, it is not the case. Different dimensions are set by entrepreneurs for uncertainty; therefore, the oxymoron as discussed above in reality justifies their actions. As per the belief of entrepreneurs, there are two dimensions of uncertainty: Uncertainty related to the ability and the uncertainty of the market. Just like most of the people, entrepreneurs too hate the market risk, however they do appreciate their own abilities that results in compensating for their hatred for risk. The main objective of this paper is to showcase the impact of overconfidence in the behavior of entrepreneur.

International Journal of Technical Research and Applications e-ISSN: 2320-8163,
www.ijtra.com Volume 2, Issue 4 (July-Aug 2014), PP. 200-202
200 | P a g e
UNDERSTANDING ENTREPRENEURSHIP:
IMPACT OF OVERCONFIDENCE ON
ENTREPRENEURSHIP
Dr. Goulap Jagadish Brahma
Asst Professor (Business Administration)
M.B.A, M.Phil, UGC NET, Ph. D (Management)
Hawassa University, Hawassa
Ethiopia.
Abstract: Economic life is full of uncertainties and only thing
that is certain here is that most of it is conducted into the
dynamic environment; this brings a question in point though:
Why individuals opt for entrepreneurship that involves a good
amount of risk, and where there are little or no returns? There
are ample research data available to show people are more
optimistic when decision is taken under uncertainty and even
show overconfidence in the judgement.
The relative ability is often overestimated by the overconfident
individuals and so probabilistically, their perceptions for their
actions seem to be safer to them in comparison to those who
show no overconfidence. Interesting findings are shown in the
sample of 2,944 entrepreneurs there are as many as 81%
people who feel their chances of obtaining success are at least
70%, there are 33% other people with a belief that the
probability of 100% exists in terms of their chances of success.
The truth is that, as many as 75% new businesses fail to
exist after 5 years. Here arises a question that, are the
entrepreneurs not in a position to see the risk, or do they carry
a different perception of the risk involved in their acts? Going
through a recent study, it is clear that the entrepreneurs are
very much cautious (even more than what we think) and the
opinion that entrepreneurs have more tolerance for risk is
considered wrong in the findings.
There are few cases though, where entrepreneurs seem to
bear less risk than normal, still it does not stop them to take
risk.
Some people find these findings controversial, but the
truth is that, it is not the case. Different dimensions are set by
entrepreneurs for uncertainty; therefore, the oxymoron as
discussed above in reality justifies their actions.
As per the belief of entrepreneurs, there are two
dimensions of uncertainty: Uncertainty related to the ability
and the uncertainty of the market. Just like most of the people,
entrepreneurs too hate the market risk, however they do
appreciate their own abilities that results in compensating for
their hatred for risk. The main objective of this paper is to
showcase the impact of overconfidence in the behavior of
entrepreneur.
I. Review
It has been analyzed by Psychologists as well, many a
time people are highly confident on the kind of abilities that
they pursue.
Over confidence establishes a mental state wherein the
people undervalue the directions of the possible outcomes.
The reason behind the same is not that they are unable to
assess them; however they tend to ignore them without
taking their importance. The reason behind the same is
merely the ability to tackle them as they arise. It is essential
to note that the tendency of overconfidence is quite common
in many cases and forms.
In most of the situations, overconfidence takes place
from the calibration studies. Here the subjects are offered a
set of G.K. questions like what is your opinion for the size
of river, Nile or Amazon- which is bigger, who is going to
win the elections and so on. Additionally, the individuals are
being asked to judge their answers’ probability to be right.
In most of the studies, individuals find the probability
of their answers to be right, though the result of their
answers was not as per the probability that was stated
earlier. This clearly shows that people tend to feel that their
knowledge is more accurate than it is in real and therefore
they access their ability even more than the average.
As a result, the overconfidence plays a very important
role in the process of decision making. Same results took
place when individuals were required to stake money on
their answers, not showing any change in their answers. In
most of the cases, individuals state that they are confident as
far as the accuracy of their answer is concerned; in fact only
80% were correct. The phenomenon of overconfidence
continued again. Even when the correct answers are being
shown to the individuals, still their level of overconfidence
remained the same. Now the question that arises is that, do
people don’t learn from their mistakes or they tend to justify
their overconfidence?
Specifically, people learn from experiences and in a
number of situations they get converted into less confident
than from being overconfident.
Generally, people are more biased towards
overconfidence. May be because of the reason that a good
part of overconfidence is not considering the unfavourable
results that are underestimating or the contrary evidences,
taking them as extreme cases or unique.
The main objective of this paper is to showcase the
importance of overconfidence in the behavior of human
being and to stress more on the way overconfidence is
affecting the behavior of entrepreneur in particular.
Thaler and DeBondt emphasized that the strongest
finding in the judgement psychology is that most of the
people are overconfident. It is basically the driving force
that motivates individuals to go for the ventures that other
individuals might not dare to take.
There are some people of the opinion that these kinds of
decisions include some irrationality levels, however as per
the recent studies there are enough evidences available to
show why such kind of irrational behavior may and in most
of the circumstances do, exist.
Work conducted in the field of finance and economics
in the last decade suggested that a kind of behavior is
triggered by overconfidence that is irrational in theory but
highly applicable in practical.
A good number of examples are available in the form of
analysts in the stock market and in the investors’ behavior,
where people show irrational behavior only because of the
International Journal of Technical Research and Applications e-ISSN: 2320-8163,
www.ijtra.com Volume 2, Issue 4 (July-Aug 2014), PP. 200-202
201 | P a g e
fact that they tend to overestimate their ability or observe
that the chances of being wrong are very rare.
It is even emphasized by Griffin and Tversky that in the
cases where limited amount of predictability exist, as in the
case of stock markets, the experts are seen to be more prone
to overconfidence as compared to the new comers.
In simple words, uncertainty that exists in the stock
market may be waged by the higher level of overconfidence
in such a manner that decision can be made.
Theoretically, decisions can be made when the
sufficient amount of information is present. Practically,
when decisions are required to be taken in the absence of
sufficient information, overconfidence gets converted into
rational decision.
II. Entrepreneurs and overconfidence
In the work of a number of researchers, the
overconfidence among entrepreneurs has been documented.
In a sample of as many as 2,900 entrepreneurs, 80% of
them, on an average 2400, are of the opinion that their
chances of success are approximately 70%. Out of the
sample, 32% are of the belief that the chances of success are
100% and as many as 75% new businesses are there that fail
to work well and get closed within next 5 years of their
operation.
It was revealed in another research by Busenitz and
Barney that when entrepreneurs were asked if the main
cause of death in USA is heart disease or cancer, against
other individuals, the entrepreneurs stated a level of
confidence in their reply which was quite higher than others
whereas the quantity of right answers were equally diffused.
It is frequently exhibited by the tendency of entrepreneurs
that they underestimate the chances of occurrence of the
unfavourable results. The chances of a new venture to earn
profit or to fail, also the impact of competition, have been
underestimated since the entrepreneurs depict
overconfidence in their ability to deal with the contingencies
or unfavourable things to take place.
Busenitz and Barney and Palichand Bagby pointed out
that although the large number of managers are
overconfident, the entrepreneurs show more overconfidence
as compared to the managers. By this finding, it can be
concluded that the start of a number of new ventures were
basically the result of the overconfidence that entrepreneur
depict.
Equally and similarly, overconfidence can be seen as
the degree responsible for the chances of failures of the new
ventures, on the condition that entrepreneurs who are
overconfident underestimate their ability to take right
decisions in launching and flourishing their new ventures.
By this it can be evaluated that if entrepreneurs show
overconfidence, the young entrepreneurs normally show
overconfidence when they shape their intention to start their
own ventures.
A number of studies also showed that the main
objective to become self-employed has greater level of
dependency on the feelings of the individuals to
independence, risk, and ownership. In simple words, due to
their perceptions, the individuals are encouraged to go on
with a new venture. Therefore, now the question comes in
mind that whether the intensions of the individuals are
affected independently by the habit of overconfidence or if
overconfidence comes as a moderator of the intensions of
entrepreneur.
It can be stated that both instances work
complementarily. Basically, the sense of ownership,
independence and risk will be facilitated by a person
becoming self employed. Although, the attempt may fail due
to not showing the confidence on your own ability to get
access, the effort may fail to get results.
The confidence level that is depicted by the individuals
will perform until it gets converted into conscious belief. As
per Forbes, a demarcation is made between self efficacy and
over confidence. Forbes more specifically makes it clear that
overconfidence is a measure of accuracy of the ability of an
individual, whereas the entrepreneurial self efficacy results
in measuring the perception of the abilities of the individual.
This kind of distinction states that overconfidence gets
converted into a subconscious phenomenon, although self
efficacy of entrepreneur gets evolved into the belief that is
consciously held.
Not just that, it was also claimed by Forbes that the
entrepreneurial self efficacy of the individual varies to
various levels of over-inflated opinions for their abilities.
Under these circumstances, the higher the over inflated
opinion, more will be the probability for the individuals to
show overconfidence in their abilities.
Depending on that, a number of entrepreneurs, with the
past business successes subsequently get converted into
overconfidence because the level of their self efficacy is
quite high. Therefore, overconfidence appears to work as an
independent variable that result in holding the relationship
between entrepreneurial intensions and self efficacy of the
entrepreneurs.
By overestimating the ability, overconfidence replaces
the lack of information. It was observed by Langer that if the
task would be more difficult, then the chance of
overconfidence to appear will also increase.
Above all, individuals that complete their tasks
successfully in the past tend to appear more confidence
regardless of the fact that their level of confidence is
justified or not.
After a certain point, the individuals start to disregard
the risks associated or the information attached to the task
and mainly on their ability which is over inflated, built up on
the past incidents which may not have been very
progressive.
In situation, the entrepreneurs are overconfident; they
show the tendency to go through their own information,
ignore the fact that they lack information on any subject or
tend to down weigh the information that is publicly
available.
Remaining individuals that carry such kind of behavior
hold the belief that the entrepreneurs are not afraid of risks
or they have more tolerance against risks. This kind of
perception can be found to exist for a number of years and
was considered to be one of the most important
entrepreneurs’ characteristics.
To that belief, contrary information was provided by
the study conducted by Wu and Knott. They felt that as
against our belief, entrepreneurs are more cautious. In a
number of cases, they tend to be more risk averse than the
usual, that too without being discouraged in taking up the
new businesses and the risk. This kind of finding although
appears to be contradicting, but in reality it is not. You can
get the explanation of the same on the basis of the
perception that the entrepreneurs carry to risk.
International Journal of Technical Research and Applications e-ISSN: 2320-8163,
www.ijtra.com Volume 2, Issue 4 (July-Aug 2014), PP. 200-202
202 | P a g e
Most of the individuals take risk as the uncertainty
level of something that may happen or not. Thus, if the
amount of uncertainty is more, greater would be the risk
involved. There are different dimensions for uncertainty as
set by entrepreneurs, which results in allowing them to carry
on with the tasks, which for a number of individuals may
appear to be uncertain.
As per the belief of the entrepreneurs, there are two
dimensions of uncertainty, one is systematic risk or the
market uncertainty and the second one is related to the
ability uncertainty. Although like most of the people, the
entrepreneurs don’t like risk, but do believe more on their
ability.
It is basically the appreciation of the ability of the
entrepreneurs that comes in and results in compensating for
the market risk; for this reason, any new business gets less
risky and appears to be more appealing.
From these findings, it is implied that if the ability of the
entrepreneurs gets appreciation, no business may appear to
be risky enough to dishearten them. Opposite to that, if there
is a high degree of uncertainty related to the ability, then
most of the entrepreneurs would avoid getting into new
ventures as they won’t be able to get rid of the systematic
risk.
It seems that the information volume that may reveal
the uncertainty level in a venture may get insignificant.
Those who are not entrepreneur try to be rational by casting
their votes not only on private rather public information too.
The same is done by the entrepreneurs but they give weight
age to their own information which is basically the result of
their ability and they tend to reduce the public information’s
value.
III. CONCLUSIONS
It is argued in this paper that overconfidence is
something that helps in characterizing the human behavior
in most of the cases. It is seen that people appreciate their
knowledge to a very great extent, even in the circumstances
where their prior experience is just contrary to that.
Inference that can be taken out from this paper is that
overconfidence is something that can be expected and in
cases where very less information is available, but the
overconfidence impact on the behavior of people may vary
based on their insight on uncertainty.
Usually those who are non-entrepreneurs show
overconfidence up to the limit where the information seems
to be not sufficient; hence the work becomes uncertain.
On the other hand, entrepreneurs show similar
overconfidence besides the fact if information is available or
not. It is basically the self-assessment of the skills of
entrepreneurs as well as their ability that can be seen as the
driving force which seems not related to the level of
information.
To compensate any missing information, their ability is
considered sufficient. When entrepreneurs are of the opinion
that their ability will be sufficient to overcome the
difficulties of objective or when they over-assess their
ability, then increase can be seen in the probability of
failures.
They are not discouraged by the prior failures as a part
of overconfidence is separating the unfavourable results,
taking them as out of the rules.
Rational behavior can be found in the entrepreneurs,
contrary to what is the belief of individuals, under the
impact of overconfidence that helps in characterizing the
human behavior.
Topic that can be taken for further research would be
when or under which kinds of circumstances the
entrepreneurial ability may not be considered sufficient to
set aside the risk in any new business.
REFERENCES
[1] Daniel, K, Hirshleifer, D, Subrahmanyam, A (1998). A
theory of overconfidence, self-attribution, and security
market under- and over-reaction. Journal of Finance, 53(5),
1839–1886.
[2] Lichtenstein, S, & Fischhoff, B (1977). Do those who know
more also know more about how much they know?
Organizational Behavior and Human Performance, 20, 159–
183
[3] Alpert, M, & Raiffa, H In Kahneman D, Slovic P, Tversky A
(Eds.) (1982). A progress report on the training of probability
assessors. Judgment under uncertainty: heuristics and biases
(pp. 294–305). Cambridge: Cambridge University Press.
[4] Svenson, O (1981). Are we all less risky and more skillful
than our fellow drivers? Acta Psychologica, 47, 143–148.
Publisher Full Text
[5] Fitzsimmons, JR, & Douglas, EJ (2005). Entrepreneurial
intentions: a cross-cultural study of potential entrepreneurs in
India, China, Thailand and Australia. Paper presented at the
Babson Kauffman entrepreneurial research conference.
Wellesley.
[6] Douglas, EJ, & Shepherd, DA (2002). Self-employment as a
career choice: attitudes, entrepreneurial intentions, and utility
maximization. Entrepreneurship Theory and Practice,
Spring,26, 81–90.
[7] Odean, T (1998). Volume, volatility, price, and profit when
all traders are above average. Journal of Finance, 53(6),
1887–1934. Publisher Full Text
[8] Busenitz, LW, & Barney, JB (1997). Differences between
entrepreneurs and managers in large organizations: biases and
heuristics in strategic decision-making. Journal of Business
Venturing,12(1), 9–30. Publisher Full Text
[9] Wu, B, & Knott, AM (2006). Entrepreneurial risk and market
entry. Management Science, 52(9), 1315–1330. Publisher
Full Text
[10] Cooper, AC, Woo, CA, Dunkelberg, W (1988). Entrepreneurs
perceived chances for success.Journal of Business Venturing,
3, 97–108. Publisher Full Text
[11] Lichtenstein, S, Fischhoff, B, Phillips, L In Kahneman D,
Slovic P, Tversky A (Eds.) (1982). Calibration of
probabilities: the state of the Art to 1980. Judgment under
uncertainty: Heuristics and biases (pp. 306–334). Cambridge:
Cambridge University Press.
[12] DeBondt, WFM, & Thaler, RH In Jarrow R, Maksimovic V,
Ziemba W (Eds.) (1995). Financial decision-making in
markets and firms: a behavioral perspective. Handbook in
operations research and management science, Vol. 9, Chap.
13 (pp. 385–410). North Holland, Amsterdam: Finance,
Elsevier.
[13] Wu, B, & Knott, AM (2006). Entrepreneurial risk and market
entry. Management Science, 52(9), 1315–1330. Publisher
Full Text
[14] Delong, BJ, Shleifer, A, Summers, L, Waldmann, RJ (1991).
The survival of noise traders in financial markets. Journal of
Business, 64(1), 1–20. Publisher Full Text
[15] Palich, LE, & Bagby, DR (1995). Using cognitive theory to
explain entrepreneurial risk-taking: challenging conventional
wisdom. Journal of Business Venturing, 10(6), 405–417.
[16] Fischhoff, B, Slovic, P, Lichtenstein, S (1977). Knowing with
certainty: the appropriateness of extreme confidence. Journal
of Experimental Psychology. Human Perception and
Performance, 3, 552–564.

Recomendados

Mind made up von
Mind made upMind made up
Mind made upDavid Williams
159 views2 Folien
“Impact of Behavioral Biases on Investors Decision Making: Male Vs Female” von
“Impact of Behavioral Biases on Investors Decision Making: Male Vs Female”“Impact of Behavioral Biases on Investors Decision Making: Male Vs Female”
“Impact of Behavioral Biases on Investors Decision Making: Male Vs Female”IOSR Journals
760 views9 Folien
behavioral biases and investment decisions von
behavioral biases and  investment decisionsbehavioral biases and  investment decisions
behavioral biases and investment decisionsمحمدفيصل بشير
290 views16 Folien
CONVECTIVE HEAT TRANSFER ENHANCEMENTS IN TUBE USING LOUVERED STRIP INSERT von
CONVECTIVE HEAT TRANSFER ENHANCEMENTS IN TUBE USING LOUVERED STRIP INSERTCONVECTIVE HEAT TRANSFER ENHANCEMENTS IN TUBE USING LOUVERED STRIP INSERT
CONVECTIVE HEAT TRANSFER ENHANCEMENTS IN TUBE USING LOUVERED STRIP INSERTInternational Journal of Technical Research & Application
535 views4 Folien
INVESTIGATION OF THE EFFECT OF CURRENT ON TENSILE STRENGTH AND NUGGET DIAMETE... von
INVESTIGATION OF THE EFFECT OF CURRENT ON TENSILE STRENGTH AND NUGGET DIAMETE...INVESTIGATION OF THE EFFECT OF CURRENT ON TENSILE STRENGTH AND NUGGET DIAMETE...
INVESTIGATION OF THE EFFECT OF CURRENT ON TENSILE STRENGTH AND NUGGET DIAMETE...International Journal of Technical Research & Application
1.1K views8 Folien

Más contenido relacionado

Destacado

COMPARATIVE STUDY OF BELL PEPPER ON THE ASPECTS OF THEIR APPROXIMATE ANALYSIS... von
COMPARATIVE STUDY OF BELL PEPPER ON THE ASPECTS OF THEIR APPROXIMATE ANALYSIS...COMPARATIVE STUDY OF BELL PEPPER ON THE ASPECTS OF THEIR APPROXIMATE ANALYSIS...
COMPARATIVE STUDY OF BELL PEPPER ON THE ASPECTS OF THEIR APPROXIMATE ANALYSIS...International Journal of Technical Research & Application
561 views3 Folien
EFFICIENT EMBEDDED SURVEILLANCE SYSTEM WITH AUTO IMAGE CAPTURING AND EMAIL SE... von
EFFICIENT EMBEDDED SURVEILLANCE SYSTEM WITH AUTO IMAGE CAPTURING AND EMAIL SE...EFFICIENT EMBEDDED SURVEILLANCE SYSTEM WITH AUTO IMAGE CAPTURING AND EMAIL SE...
EFFICIENT EMBEDDED SURVEILLANCE SYSTEM WITH AUTO IMAGE CAPTURING AND EMAIL SE...International Journal of Technical Research & Application
315 views4 Folien
STUDIES ON THE ANTIBIOTIC RESISTANCE USING URINARY TRACT ISOLATES OF E.COLI. von
STUDIES ON THE ANTIBIOTIC RESISTANCE USING URINARY TRACT ISOLATES OF E.COLI.STUDIES ON THE ANTIBIOTIC RESISTANCE USING URINARY TRACT ISOLATES OF E.COLI.
STUDIES ON THE ANTIBIOTIC RESISTANCE USING URINARY TRACT ISOLATES OF E.COLI.International Journal of Technical Research & Application
235 views3 Folien

Destacado(20)

Similar a UNDERSTANDING ENTREPRENEURSHIP: IMPACT OF OVERCONFIDENCE ON ENTREPRENEURSHIP

Behavioral finance, heuristics and marketing von
Behavioral finance, heuristics and marketing Behavioral finance, heuristics and marketing
Behavioral finance, heuristics and marketing A.W. Berry
1.5K views13 Folien
A STUDY ON IMPACT OF DEMOGRAPHIC FACTORS ON OVERCONFIDENCE BIAS IN INVESTMENT... von
A STUDY ON IMPACT OF DEMOGRAPHIC FACTORS ON OVERCONFIDENCE BIAS IN INVESTMENT...A STUDY ON IMPACT OF DEMOGRAPHIC FACTORS ON OVERCONFIDENCE BIAS IN INVESTMENT...
A STUDY ON IMPACT OF DEMOGRAPHIC FACTORS ON OVERCONFIDENCE BIAS IN INVESTMENT...Sandra Long
3 views8 Folien
The effects of psychology on individual investors behaviors von
The effects of psychology on individual investors behaviorsThe effects of psychology on individual investors behaviors
The effects of psychology on individual investors behaviorsNghiên Cứu Định Lượng
1.1K views11 Folien
FACTORS AFFECTING INVESTMENT BEHAVIOUR AMONG YOUNG PROFESSIONALS von
FACTORS AFFECTING INVESTMENT BEHAVIOUR AMONG YOUNG PROFESSIONALSFACTORS AFFECTING INVESTMENT BEHAVIOUR AMONG YOUNG PROFESSIONALS
FACTORS AFFECTING INVESTMENT BEHAVIOUR AMONG YOUNG PROFESSIONALSInternational Journal of Technical Research & Application
955 views6 Folien
Learning session 2nd von
Learning session 2ndLearning session 2nd
Learning session 2ndgauravsharmamba
390 views9 Folien
FINAL MICRO PAPER von
FINAL MICRO PAPERFINAL MICRO PAPER
FINAL MICRO PAPERGreg Poapst
381 views50 Folien

Similar a UNDERSTANDING ENTREPRENEURSHIP: IMPACT OF OVERCONFIDENCE ON ENTREPRENEURSHIP(20)

Behavioral finance, heuristics and marketing von A.W. Berry
Behavioral finance, heuristics and marketing Behavioral finance, heuristics and marketing
Behavioral finance, heuristics and marketing
A.W. Berry1.5K views
A STUDY ON IMPACT OF DEMOGRAPHIC FACTORS ON OVERCONFIDENCE BIAS IN INVESTMENT... von Sandra Long
A STUDY ON IMPACT OF DEMOGRAPHIC FACTORS ON OVERCONFIDENCE BIAS IN INVESTMENT...A STUDY ON IMPACT OF DEMOGRAPHIC FACTORS ON OVERCONFIDENCE BIAS IN INVESTMENT...
A STUDY ON IMPACT OF DEMOGRAPHIC FACTORS ON OVERCONFIDENCE BIAS IN INVESTMENT...
Sandra Long3 views
Loss-averse, overconfident, that’s me von Joel Siew
Loss-averse, overconfident, that’s meLoss-averse, overconfident, that’s me
Loss-averse, overconfident, that’s me
Joel Siew56 views
There are no other sources It need to be from.docx von write4
There are no other sources It need to be from.docxThere are no other sources It need to be from.docx
There are no other sources It need to be from.docx
write42 views
Capital biasReducing human error in capital decision-making von TawnaDelatorrejs
Capital biasReducing human error in capital decision-makingCapital biasReducing human error in capital decision-making
Capital biasReducing human error in capital decision-making
Capital bias reducing human error in capital decision making von sodhi3
Capital bias reducing human error in capital decision makingCapital bias reducing human error in capital decision making
Capital bias reducing human error in capital decision making
sodhi356 views
An analysis of investors behavior while making investment decision von aamirank
An analysis of investors behavior while making investment decisionAn analysis of investors behavior while making investment decision
An analysis of investors behavior while making investment decision
aamirank524 views
Evidence-Based-Practice-The-Basic-Principles-vs-Dec-2015.pdf von JayaramB11
Evidence-Based-Practice-The-Basic-Principles-vs-Dec-2015.pdfEvidence-Based-Practice-The-Basic-Principles-vs-Dec-2015.pdf
Evidence-Based-Practice-The-Basic-Principles-vs-Dec-2015.pdf
JayaramB1118 views
There is no such person as an entrepreneur, just a von Murray Hunter
There is no such person as an entrepreneur, just aThere is no such person as an entrepreneur, just a
There is no such person as an entrepreneur, just a
Murray Hunter982 views
What women can teach men about investing von Alpesh Patel
What women can teach men about investingWhat women can teach men about investing
What women can teach men about investing
Alpesh Patel125 views
Filmore Enterprises Essay Examples von Amanda Marie
Filmore Enterprises Essay ExamplesFilmore Enterprises Essay Examples
Filmore Enterprises Essay Examples
Amanda Marie2 views

Más de International Journal of Technical Research & Application

EXPONENTIAL SMOOTHING OF POSTPONEMENT RATES IN OPERATION THEATRES OF ADVANCED... von
EXPONENTIAL SMOOTHING OF POSTPONEMENT RATES IN OPERATION THEATRES OF ADVANCED...EXPONENTIAL SMOOTHING OF POSTPONEMENT RATES IN OPERATION THEATRES OF ADVANCED...
EXPONENTIAL SMOOTHING OF POSTPONEMENT RATES IN OPERATION THEATRES OF ADVANCED...International Journal of Technical Research & Application
294 views7 Folien
POSTPONEMENT OF SCHEDULED GENERAL SURGERIES IN A TERTIARY CARE HOSPITAL - A T... von
POSTPONEMENT OF SCHEDULED GENERAL SURGERIES IN A TERTIARY CARE HOSPITAL - A T...POSTPONEMENT OF SCHEDULED GENERAL SURGERIES IN A TERTIARY CARE HOSPITAL - A T...
POSTPONEMENT OF SCHEDULED GENERAL SURGERIES IN A TERTIARY CARE HOSPITAL - A T...International Journal of Technical Research & Application
312 views6 Folien
ENERGY GAP INVESTIGATION AND CHARACTERIZATION OF KESTERITE CU2ZNSNS4 THIN FIL... von
ENERGY GAP INVESTIGATION AND CHARACTERIZATION OF KESTERITE CU2ZNSNS4 THIN FIL...ENERGY GAP INVESTIGATION AND CHARACTERIZATION OF KESTERITE CU2ZNSNS4 THIN FIL...
ENERGY GAP INVESTIGATION AND CHARACTERIZATION OF KESTERITE CU2ZNSNS4 THIN FIL...International Journal of Technical Research & Application
222 views4 Folien

Más de International Journal of Technical Research & Application(20)

Último

Drama KS5 Breakdown von
Drama KS5 BreakdownDrama KS5 Breakdown
Drama KS5 BreakdownWestHatch
64 views2 Folien
Plastic waste.pdf von
Plastic waste.pdfPlastic waste.pdf
Plastic waste.pdfalqaseedae
110 views5 Folien
JiscOAWeek_LAIR_slides_October2023.pptx von
JiscOAWeek_LAIR_slides_October2023.pptxJiscOAWeek_LAIR_slides_October2023.pptx
JiscOAWeek_LAIR_slides_October2023.pptxJisc
72 views8 Folien
OEB 2023 Co-learning To Speed Up AI Implementation in Courses.pptx von
OEB 2023 Co-learning To Speed Up AI Implementation in Courses.pptxOEB 2023 Co-learning To Speed Up AI Implementation in Courses.pptx
OEB 2023 Co-learning To Speed Up AI Implementation in Courses.pptxInge de Waard
165 views29 Folien
UWP OA Week Presentation (1).pptx von
UWP OA Week Presentation (1).pptxUWP OA Week Presentation (1).pptx
UWP OA Week Presentation (1).pptxJisc
68 views11 Folien

Último(20)

Drama KS5 Breakdown von WestHatch
Drama KS5 BreakdownDrama KS5 Breakdown
Drama KS5 Breakdown
WestHatch64 views
Plastic waste.pdf von alqaseedae
Plastic waste.pdfPlastic waste.pdf
Plastic waste.pdf
alqaseedae110 views
JiscOAWeek_LAIR_slides_October2023.pptx von Jisc
JiscOAWeek_LAIR_slides_October2023.pptxJiscOAWeek_LAIR_slides_October2023.pptx
JiscOAWeek_LAIR_slides_October2023.pptx
Jisc72 views
OEB 2023 Co-learning To Speed Up AI Implementation in Courses.pptx von Inge de Waard
OEB 2023 Co-learning To Speed Up AI Implementation in Courses.pptxOEB 2023 Co-learning To Speed Up AI Implementation in Courses.pptx
OEB 2023 Co-learning To Speed Up AI Implementation in Courses.pptx
Inge de Waard165 views
UWP OA Week Presentation (1).pptx von Jisc
UWP OA Week Presentation (1).pptxUWP OA Week Presentation (1).pptx
UWP OA Week Presentation (1).pptx
Jisc68 views
Class 10 English lesson plans von TARIQ KHAN
Class 10 English  lesson plansClass 10 English  lesson plans
Class 10 English lesson plans
TARIQ KHAN239 views
Solar System and Galaxies.pptx von DrHafizKosar
Solar System and Galaxies.pptxSolar System and Galaxies.pptx
Solar System and Galaxies.pptx
DrHafizKosar79 views
Structure and Functions of Cell.pdf von Nithya Murugan
Structure and Functions of Cell.pdfStructure and Functions of Cell.pdf
Structure and Functions of Cell.pdf
Nithya Murugan317 views
Compare the flora and fauna of Kerala and Chhattisgarh ( Charttabulation) von AnshulDewangan3
 Compare the flora and fauna of Kerala and Chhattisgarh ( Charttabulation) Compare the flora and fauna of Kerala and Chhattisgarh ( Charttabulation)
Compare the flora and fauna of Kerala and Chhattisgarh ( Charttabulation)
AnshulDewangan3275 views
Classification of crude drugs.pptx von GayatriPatra14
Classification of crude drugs.pptxClassification of crude drugs.pptx
Classification of crude drugs.pptx
GayatriPatra1465 views
11.28.23 Social Capital and Social Exclusion.pptx von mary850239
11.28.23 Social Capital and Social Exclusion.pptx11.28.23 Social Capital and Social Exclusion.pptx
11.28.23 Social Capital and Social Exclusion.pptx
mary850239112 views
AI Tools for Business and Startups von Svetlin Nakov
AI Tools for Business and StartupsAI Tools for Business and Startups
AI Tools for Business and Startups
Svetlin Nakov89 views

UNDERSTANDING ENTREPRENEURSHIP: IMPACT OF OVERCONFIDENCE ON ENTREPRENEURSHIP

  • 1. International Journal of Technical Research and Applications e-ISSN: 2320-8163, www.ijtra.com Volume 2, Issue 4 (July-Aug 2014), PP. 200-202 200 | P a g e UNDERSTANDING ENTREPRENEURSHIP: IMPACT OF OVERCONFIDENCE ON ENTREPRENEURSHIP Dr. Goulap Jagadish Brahma Asst Professor (Business Administration) M.B.A, M.Phil, UGC NET, Ph. D (Management) Hawassa University, Hawassa Ethiopia. Abstract: Economic life is full of uncertainties and only thing that is certain here is that most of it is conducted into the dynamic environment; this brings a question in point though: Why individuals opt for entrepreneurship that involves a good amount of risk, and where there are little or no returns? There are ample research data available to show people are more optimistic when decision is taken under uncertainty and even show overconfidence in the judgement. The relative ability is often overestimated by the overconfident individuals and so probabilistically, their perceptions for their actions seem to be safer to them in comparison to those who show no overconfidence. Interesting findings are shown in the sample of 2,944 entrepreneurs there are as many as 81% people who feel their chances of obtaining success are at least 70%, there are 33% other people with a belief that the probability of 100% exists in terms of their chances of success. The truth is that, as many as 75% new businesses fail to exist after 5 years. Here arises a question that, are the entrepreneurs not in a position to see the risk, or do they carry a different perception of the risk involved in their acts? Going through a recent study, it is clear that the entrepreneurs are very much cautious (even more than what we think) and the opinion that entrepreneurs have more tolerance for risk is considered wrong in the findings. There are few cases though, where entrepreneurs seem to bear less risk than normal, still it does not stop them to take risk. Some people find these findings controversial, but the truth is that, it is not the case. Different dimensions are set by entrepreneurs for uncertainty; therefore, the oxymoron as discussed above in reality justifies their actions. As per the belief of entrepreneurs, there are two dimensions of uncertainty: Uncertainty related to the ability and the uncertainty of the market. Just like most of the people, entrepreneurs too hate the market risk, however they do appreciate their own abilities that results in compensating for their hatred for risk. The main objective of this paper is to showcase the impact of overconfidence in the behavior of entrepreneur. I. Review It has been analyzed by Psychologists as well, many a time people are highly confident on the kind of abilities that they pursue. Over confidence establishes a mental state wherein the people undervalue the directions of the possible outcomes. The reason behind the same is not that they are unable to assess them; however they tend to ignore them without taking their importance. The reason behind the same is merely the ability to tackle them as they arise. It is essential to note that the tendency of overconfidence is quite common in many cases and forms. In most of the situations, overconfidence takes place from the calibration studies. Here the subjects are offered a set of G.K. questions like what is your opinion for the size of river, Nile or Amazon- which is bigger, who is going to win the elections and so on. Additionally, the individuals are being asked to judge their answers’ probability to be right. In most of the studies, individuals find the probability of their answers to be right, though the result of their answers was not as per the probability that was stated earlier. This clearly shows that people tend to feel that their knowledge is more accurate than it is in real and therefore they access their ability even more than the average. As a result, the overconfidence plays a very important role in the process of decision making. Same results took place when individuals were required to stake money on their answers, not showing any change in their answers. In most of the cases, individuals state that they are confident as far as the accuracy of their answer is concerned; in fact only 80% were correct. The phenomenon of overconfidence continued again. Even when the correct answers are being shown to the individuals, still their level of overconfidence remained the same. Now the question that arises is that, do people don’t learn from their mistakes or they tend to justify their overconfidence? Specifically, people learn from experiences and in a number of situations they get converted into less confident than from being overconfident. Generally, people are more biased towards overconfidence. May be because of the reason that a good part of overconfidence is not considering the unfavourable results that are underestimating or the contrary evidences, taking them as extreme cases or unique. The main objective of this paper is to showcase the importance of overconfidence in the behavior of human being and to stress more on the way overconfidence is affecting the behavior of entrepreneur in particular. Thaler and DeBondt emphasized that the strongest finding in the judgement psychology is that most of the people are overconfident. It is basically the driving force that motivates individuals to go for the ventures that other individuals might not dare to take. There are some people of the opinion that these kinds of decisions include some irrationality levels, however as per the recent studies there are enough evidences available to show why such kind of irrational behavior may and in most of the circumstances do, exist. Work conducted in the field of finance and economics in the last decade suggested that a kind of behavior is triggered by overconfidence that is irrational in theory but highly applicable in practical. A good number of examples are available in the form of analysts in the stock market and in the investors’ behavior, where people show irrational behavior only because of the
  • 2. International Journal of Technical Research and Applications e-ISSN: 2320-8163, www.ijtra.com Volume 2, Issue 4 (July-Aug 2014), PP. 200-202 201 | P a g e fact that they tend to overestimate their ability or observe that the chances of being wrong are very rare. It is even emphasized by Griffin and Tversky that in the cases where limited amount of predictability exist, as in the case of stock markets, the experts are seen to be more prone to overconfidence as compared to the new comers. In simple words, uncertainty that exists in the stock market may be waged by the higher level of overconfidence in such a manner that decision can be made. Theoretically, decisions can be made when the sufficient amount of information is present. Practically, when decisions are required to be taken in the absence of sufficient information, overconfidence gets converted into rational decision. II. Entrepreneurs and overconfidence In the work of a number of researchers, the overconfidence among entrepreneurs has been documented. In a sample of as many as 2,900 entrepreneurs, 80% of them, on an average 2400, are of the opinion that their chances of success are approximately 70%. Out of the sample, 32% are of the belief that the chances of success are 100% and as many as 75% new businesses are there that fail to work well and get closed within next 5 years of their operation. It was revealed in another research by Busenitz and Barney that when entrepreneurs were asked if the main cause of death in USA is heart disease or cancer, against other individuals, the entrepreneurs stated a level of confidence in their reply which was quite higher than others whereas the quantity of right answers were equally diffused. It is frequently exhibited by the tendency of entrepreneurs that they underestimate the chances of occurrence of the unfavourable results. The chances of a new venture to earn profit or to fail, also the impact of competition, have been underestimated since the entrepreneurs depict overconfidence in their ability to deal with the contingencies or unfavourable things to take place. Busenitz and Barney and Palichand Bagby pointed out that although the large number of managers are overconfident, the entrepreneurs show more overconfidence as compared to the managers. By this finding, it can be concluded that the start of a number of new ventures were basically the result of the overconfidence that entrepreneur depict. Equally and similarly, overconfidence can be seen as the degree responsible for the chances of failures of the new ventures, on the condition that entrepreneurs who are overconfident underestimate their ability to take right decisions in launching and flourishing their new ventures. By this it can be evaluated that if entrepreneurs show overconfidence, the young entrepreneurs normally show overconfidence when they shape their intention to start their own ventures. A number of studies also showed that the main objective to become self-employed has greater level of dependency on the feelings of the individuals to independence, risk, and ownership. In simple words, due to their perceptions, the individuals are encouraged to go on with a new venture. Therefore, now the question comes in mind that whether the intensions of the individuals are affected independently by the habit of overconfidence or if overconfidence comes as a moderator of the intensions of entrepreneur. It can be stated that both instances work complementarily. Basically, the sense of ownership, independence and risk will be facilitated by a person becoming self employed. Although, the attempt may fail due to not showing the confidence on your own ability to get access, the effort may fail to get results. The confidence level that is depicted by the individuals will perform until it gets converted into conscious belief. As per Forbes, a demarcation is made between self efficacy and over confidence. Forbes more specifically makes it clear that overconfidence is a measure of accuracy of the ability of an individual, whereas the entrepreneurial self efficacy results in measuring the perception of the abilities of the individual. This kind of distinction states that overconfidence gets converted into a subconscious phenomenon, although self efficacy of entrepreneur gets evolved into the belief that is consciously held. Not just that, it was also claimed by Forbes that the entrepreneurial self efficacy of the individual varies to various levels of over-inflated opinions for their abilities. Under these circumstances, the higher the over inflated opinion, more will be the probability for the individuals to show overconfidence in their abilities. Depending on that, a number of entrepreneurs, with the past business successes subsequently get converted into overconfidence because the level of their self efficacy is quite high. Therefore, overconfidence appears to work as an independent variable that result in holding the relationship between entrepreneurial intensions and self efficacy of the entrepreneurs. By overestimating the ability, overconfidence replaces the lack of information. It was observed by Langer that if the task would be more difficult, then the chance of overconfidence to appear will also increase. Above all, individuals that complete their tasks successfully in the past tend to appear more confidence regardless of the fact that their level of confidence is justified or not. After a certain point, the individuals start to disregard the risks associated or the information attached to the task and mainly on their ability which is over inflated, built up on the past incidents which may not have been very progressive. In situation, the entrepreneurs are overconfident; they show the tendency to go through their own information, ignore the fact that they lack information on any subject or tend to down weigh the information that is publicly available. Remaining individuals that carry such kind of behavior hold the belief that the entrepreneurs are not afraid of risks or they have more tolerance against risks. This kind of perception can be found to exist for a number of years and was considered to be one of the most important entrepreneurs’ characteristics. To that belief, contrary information was provided by the study conducted by Wu and Knott. They felt that as against our belief, entrepreneurs are more cautious. In a number of cases, they tend to be more risk averse than the usual, that too without being discouraged in taking up the new businesses and the risk. This kind of finding although appears to be contradicting, but in reality it is not. You can get the explanation of the same on the basis of the perception that the entrepreneurs carry to risk.
  • 3. International Journal of Technical Research and Applications e-ISSN: 2320-8163, www.ijtra.com Volume 2, Issue 4 (July-Aug 2014), PP. 200-202 202 | P a g e Most of the individuals take risk as the uncertainty level of something that may happen or not. Thus, if the amount of uncertainty is more, greater would be the risk involved. There are different dimensions for uncertainty as set by entrepreneurs, which results in allowing them to carry on with the tasks, which for a number of individuals may appear to be uncertain. As per the belief of the entrepreneurs, there are two dimensions of uncertainty, one is systematic risk or the market uncertainty and the second one is related to the ability uncertainty. Although like most of the people, the entrepreneurs don’t like risk, but do believe more on their ability. It is basically the appreciation of the ability of the entrepreneurs that comes in and results in compensating for the market risk; for this reason, any new business gets less risky and appears to be more appealing. From these findings, it is implied that if the ability of the entrepreneurs gets appreciation, no business may appear to be risky enough to dishearten them. Opposite to that, if there is a high degree of uncertainty related to the ability, then most of the entrepreneurs would avoid getting into new ventures as they won’t be able to get rid of the systematic risk. It seems that the information volume that may reveal the uncertainty level in a venture may get insignificant. Those who are not entrepreneur try to be rational by casting their votes not only on private rather public information too. The same is done by the entrepreneurs but they give weight age to their own information which is basically the result of their ability and they tend to reduce the public information’s value. III. CONCLUSIONS It is argued in this paper that overconfidence is something that helps in characterizing the human behavior in most of the cases. It is seen that people appreciate their knowledge to a very great extent, even in the circumstances where their prior experience is just contrary to that. Inference that can be taken out from this paper is that overconfidence is something that can be expected and in cases where very less information is available, but the overconfidence impact on the behavior of people may vary based on their insight on uncertainty. Usually those who are non-entrepreneurs show overconfidence up to the limit where the information seems to be not sufficient; hence the work becomes uncertain. On the other hand, entrepreneurs show similar overconfidence besides the fact if information is available or not. It is basically the self-assessment of the skills of entrepreneurs as well as their ability that can be seen as the driving force which seems not related to the level of information. To compensate any missing information, their ability is considered sufficient. When entrepreneurs are of the opinion that their ability will be sufficient to overcome the difficulties of objective or when they over-assess their ability, then increase can be seen in the probability of failures. They are not discouraged by the prior failures as a part of overconfidence is separating the unfavourable results, taking them as out of the rules. Rational behavior can be found in the entrepreneurs, contrary to what is the belief of individuals, under the impact of overconfidence that helps in characterizing the human behavior. Topic that can be taken for further research would be when or under which kinds of circumstances the entrepreneurial ability may not be considered sufficient to set aside the risk in any new business. REFERENCES [1] Daniel, K, Hirshleifer, D, Subrahmanyam, A (1998). A theory of overconfidence, self-attribution, and security market under- and over-reaction. Journal of Finance, 53(5), 1839–1886. [2] Lichtenstein, S, & Fischhoff, B (1977). Do those who know more also know more about how much they know? Organizational Behavior and Human Performance, 20, 159– 183 [3] Alpert, M, & Raiffa, H In Kahneman D, Slovic P, Tversky A (Eds.) (1982). A progress report on the training of probability assessors. Judgment under uncertainty: heuristics and biases (pp. 294–305). Cambridge: Cambridge University Press. [4] Svenson, O (1981). Are we all less risky and more skillful than our fellow drivers? Acta Psychologica, 47, 143–148. Publisher Full Text [5] Fitzsimmons, JR, & Douglas, EJ (2005). Entrepreneurial intentions: a cross-cultural study of potential entrepreneurs in India, China, Thailand and Australia. Paper presented at the Babson Kauffman entrepreneurial research conference. Wellesley. [6] Douglas, EJ, & Shepherd, DA (2002). Self-employment as a career choice: attitudes, entrepreneurial intentions, and utility maximization. Entrepreneurship Theory and Practice, Spring,26, 81–90. [7] Odean, T (1998). Volume, volatility, price, and profit when all traders are above average. Journal of Finance, 53(6), 1887–1934. Publisher Full Text [8] Busenitz, LW, & Barney, JB (1997). Differences between entrepreneurs and managers in large organizations: biases and heuristics in strategic decision-making. Journal of Business Venturing,12(1), 9–30. Publisher Full Text [9] Wu, B, & Knott, AM (2006). Entrepreneurial risk and market entry. Management Science, 52(9), 1315–1330. Publisher Full Text [10] Cooper, AC, Woo, CA, Dunkelberg, W (1988). Entrepreneurs perceived chances for success.Journal of Business Venturing, 3, 97–108. Publisher Full Text [11] Lichtenstein, S, Fischhoff, B, Phillips, L In Kahneman D, Slovic P, Tversky A (Eds.) (1982). Calibration of probabilities: the state of the Art to 1980. Judgment under uncertainty: Heuristics and biases (pp. 306–334). Cambridge: Cambridge University Press. [12] DeBondt, WFM, & Thaler, RH In Jarrow R, Maksimovic V, Ziemba W (Eds.) (1995). Financial decision-making in markets and firms: a behavioral perspective. Handbook in operations research and management science, Vol. 9, Chap. 13 (pp. 385–410). North Holland, Amsterdam: Finance, Elsevier. [13] Wu, B, & Knott, AM (2006). Entrepreneurial risk and market entry. Management Science, 52(9), 1315–1330. Publisher Full Text [14] Delong, BJ, Shleifer, A, Summers, L, Waldmann, RJ (1991). The survival of noise traders in financial markets. Journal of Business, 64(1), 1–20. Publisher Full Text [15] Palich, LE, & Bagby, DR (1995). Using cognitive theory to explain entrepreneurial risk-taking: challenging conventional wisdom. Journal of Business Venturing, 10(6), 405–417. [16] Fischhoff, B, Slovic, P, Lichtenstein, S (1977). Knowing with certainty: the appropriateness of extreme confidence. Journal of Experimental Psychology. Human Perception and Performance, 3, 552–564.