Please use this form to submit your study for inclusion into our database. It will be checked by a member of the Innovation Growth Lab team, who may be in contact to ask for more information. Your email address * Your name * Title * The name of the study Short summary In the context of a lab experiment intended to mimick market entry decisions, overconfidence leads to the neglect of the quality of competition. When post-entry payoffs are based on individual abilities, individuals tend to overestimate their chances of relative success and enter more frequently. Surprisingly, overconfidence is even stronger when individuals' self-select into the experimental sessions knowing their success will depend partly on their skill. A brief description of the project's goals and its current state Abstract <p>Psychological studies show that most people are overconfident about their own relative abilities, and unreasonably optimistic about their futures. This study explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting - entry into competitive games or markets. Many empirical studies show that most new businesses fail within a few years. Some possible explanations for the high rate of business failure are reviewed. The hypothesis that business failure is a result of managers acting on the optimism about relative skill they exhibit in surveys is considered. The findings are consistent with the prediction that overconfidence leads to excessive business entry.</p> The full abstract of the study, if available Links http://www.jstor.org/stable/116990 Links to any published papers and related discussions Authors * Affiliations Academic and other institutes that the authors of the study are members of Delivery partner Organisations involved in delivering the trial, if appropriate Year Year Year199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020202120222023202420252026 Month MonthJanFebMarAprMayJunJulAugSepOctNovDec Day Day12345678910111213141516171819202122232425262728293031 Journal Journal publishing the study, if available Publication stage * Working Paper Published Ongoing Research Forthcoming Discussion Paper Research theme * Entrepreneurship Innovation Business Growth Country Country or countries where this study took place. Topics What sort of topics does the study cover? Sample attributes Hypotheses / research question Do optimistic biases influence economic behaviour in the setting of entry into competitive games or markets? Hypothesis: managers acting on the optimism about relative skill they exhibit is a significant contributor to the number of business failures, as it leads to business entry mistakes. Sample Trial population and sample selection Subjects were undergraduates and M.B.A.'s at the University of Chicago and The Wharton School of business. They were recruited either using standard recruiting instructions or "self-selection" instructions where subjects were asked if they would like to volunteer for an experiment in which performance on sports or current events trivia would determine their payoff, and people who were very good might earn a considerable sum of money. Subjects were seated in a large classroom where they were explained the two types of ranking systems and were informed that there would be two sequences of 12 rounds for each ranking condition. Subjects were informed that the decisions they made for one of the rounds, chosen randomly, would determine their payoff. Number of treatment groups Size of treatment groups 60 individuals Size of control group Unit of analysis Clustered? Yes No Cluster details Trial attributes Treatment description Players of a game simultaneously choose without communicating, whether to enter a market or not. There is a preannounced market capacity. Payoffs are such that players want to enter only if the number of expected entrants (including themselves) is less than the capacity. If they do enter, players' payoffs depend on a subject's rank relative to other entrants, as well as the capacity/number of other entrants. Ranks depend on either a chance device, or on a subject's skill; subjects in some experiments are told in advance that the experiment depends on skill (hence, more skilled subjects presumably self-select into the experiment); and subjects forecast the number of entrants in each period. The top entrants under capacity share $50 proportionally, with higher ranking entrants earning more. All entrants ranking below the capacity cutoff lose $10. The design was chosen to model the initial entry behaviour by firms that do not learn much about their competitive advantage until after they incur substantial nonsalvageable fixed costs. Actual ranks are assigned in two different ways: each subject is ranked by a random drawing, and also ranked according to his relative performance on a skill or trivia task. Rounds of data collection Baseline data collection and method First, subjects were recruited by either standard recruiting or "self-selection", and volunteers provided basic demographic data. Data collection method and data collected Evaluation Outcome variables <p>Entrants' profits, number of entrants.</p> Results <p>There is more entry and lower industry profit when people are betting on their own relative skill rather than on a random device. Random-rank: industry profit is positive in 77% of rounds, and total profit is only negative in 6% of rounds. Average industry profit across rounds is $16.87. Skill-rank: Industry profit is strictly positive in only 40% of rounds, and negative in 42% of rounds. Average profit across the skill-rank rounds is -$1.56.</p> Intervention costs Not available. Cost benefit ratio Reference Camerer, C., & Lovallo, D., 1999. 'Overconfidence and Excess Entry: An Experimental Approach'. American Economic Review, pages 306-318. Citation for use in academic references
