Overconfidence, Misjudgment, and Market Entry: Experimental Evidence from Panama

Abstract

This paper investigates how overconfidence (as an endogenous characteristic of the decision-maker) and misjudgment of merit (as an exogenous property of the market) influence the decision to enter a competitive market. In the experimental design, we use a heterogeneous subject pool composed of people with different knowledge of entrepreneurship: full-time entrepreneurs, part-time entrepreneurs, salespeople, MBA students, women attending a course in entrepreneurship, and members of criminal gangs. We find that overconfidence is a determinant of market entry, and in the presence of merit-misjudgment, overconfidence becomes more relevant for individuals already embedded in an entrepreneurial network.