Entrepreneurial Success and Failure: Confidence and Fallible Judgement

Abstract

Excess entry - or the high failure rate of market-entry decisions - is often attributed to overconfidence exhibited by entrepreneurs. We show analytically that whereas excess entry is an inevitable consequence of imperfect assessments of entrepreneurial skill, it does not imply overconfidence. Judgmental fallibility leads to excess entry even when everyone is underconfident. Self-selection implies greater confidence (but not necessarily overconfidence) among those who start new businesses than those who do not and among successful entrants than failures. Our results question claims that entrepreneurs are overconfident and emphasize the need to understand the role of judgmental fallibility in producing economic outcomes.