Optimism and Overconfidence Biases among Entrepreneurs: a benchmarking-model

Optimism and overconfidence are well documented cognitive biases in the entrepreneurship literature (see Shepherd et al., 2015). Although these attitudes are typically thought to be almost overlapped, empirical studies make evidence of their different construct (see Trevelyan, 2008, 2011). In the paper at hand we go a step further in dwelling the descriptive and normative motivations inducing misconfidence biases to arise. First, we introduce the definition of optimism as under-estimation of the task difficulty. Second, we define overconfidence as the tendency to overestimate the probability to achieve an uncertain task. To calculate this probability we set up a prescriptive benchmarking-based model. Third, we spotlight situations in enterprise risk management (ERM) where misconfidence biases in judgment emerge. In the path of Bordley et al. (2014) results, overconfidence arises in presence of: (1) optimism coupled with poor entrepreneurial projects, and (2) pessimism coupled with good entrepreneurial projects. The influence of the escalation and de-escalation of commitment effect biases is also discussed. Our study builds a normative foundation for overconfidence and casts light on which circumstances that occurs. Our results have also practical implications. In fact, it is important for entrepreneurs be aware of situations where self-confidence is normatively biased and so, if necessary, mindfully rethink the assumptions and strategies.