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Overconfidence and Excess Entry: An Experimental Approach

Camerer, Colin F. and Lovallo, Dan (1998) Overconfidence and Excess Entry: An Experimental Approach. Social Science Working Paper, 975. California Institute of Technology , Pasadena, CA. (Unpublished)

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Psychological studies show that most people are overconfident about their own relative abilities, and unreasonably optimistic about their futures (e.g. Shelly E. Taylor and J.D. Brown, 1988; Neil D. Weinstein, 1980). When assessing their position in a distribution of peers on almost any positive trait-- like driving ability (Ola Svenson, 1981 ), income prospects, or longevity-- a vast majority of people say they are above the average, although of course, only half can be (if the trait is symmetrically distributed). This paper 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. For example, using plant level data from the U.S. Census of Manufacturers spanning 1963-1982, Timothy Dunne et al. (1988) estimated that 61.5 percent of all entrants exited within five years and 79.6 percent exited within 10 years. Most of these exits are failures (see also Dunne et al., 1989a, 1989b; D. Shapiro and R.S. Khemani, 1987).

Item Type:Report or Paper (Working Paper)
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URLURL TypeDescription ItemPublished Version
Camerer, Colin F.0000-0003-4049-1871
Additional Information:Revised version. Original dated to July 1996. Help and comments were received from Daniel Kahneman, Marc Knez, Matthew Rabin, David Teece, Dick Thaler, participants at the MacArthur Foundation Preferences Group, the 1995 J/DM Society, workshops at the Universities of Chicago and Colorado, UCLA, Harvard Business School, and Wharton, and several anonymous referees. Gail Nash provided superb secretarial help and Roberto Weber provided research assistance. The research was funded by NSF SBR-9511001. Published as Camerer, C., & Lovallo, D. (1999). Overconfidence and excess entry: An experimental approach. The American Economic Review, 89(1), 306-318.
Group:Social Science Working Papers
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Series Name:Social Science Working Paper
Issue or Number:975
Record Number:CaltechAUTHORS:20170815-170009974
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80455
Deposited By: Jacquelyn Bussone
Deposited On:16 Aug 2017 16:36
Last Modified:03 Oct 2019 18:31

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