Overconfidence and Excess Entry: An Experimental Approach

Camerer, Colin F.; Lovallo, Dan

doi:10.1257/aer.89.1.306

Cited by 1,724 publications

(687 citation statements)

References 18 publications

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“…Yet research has documented numerous costs of this overconfidence. For example, falsely believing one is more capable than others leads entrepreneurs to risk too much in new ventures (Camerer & Lovallo, 1999), CEOs to engage in too many acquisitions of other firms (Malmendier & Tate, 2005), and nations to initiate too many military confrontations (Johnson, 2004).…”

Section: Introductionmentioning

confidence: 99%

When overconfidence is revealed to others: Testing the status-enhancement theory of overconfidence

Kennedy

Anderson

Moore

2013

Organizational Behavior and Human Decision Processes

132

101

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Section: Introductionmentioning

confidence: 99%

When overconfidence is revealed to others: Testing the status-enhancement theory of overconfidence

Kennedy

Anderson

Moore

2013

Organizational Behavior and Human Decision Processes

132

101

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“…There is an undeniable benefit to anticipating potential risks, losses, embarrassments, and disasters. Overly optimistic entrepreneurs lose a great deal of money on businesses that fail (Balasuriya, Muradoglu, & Ayton, 2010;Camerer & Lovallo, 1999).Excessive optimism can undermine the motivation to take protective action against risks 3 OPTIMISTIC ABOUT OPTIMISM (Weinstein & Lyon, 1999). In social situations, people who overestimate their popularity run the risk of social ostracism (Anderson, Srivastava, Beer, Spataro, & Chatman, 2006).…”

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confidence: 99%

(Too) optimistic about optimism: The belief that optimism improves performance.

Tenney

Logg

Moore

2015

Journal of Personality and Social Psychology

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A series of experiments investigated why people value optimism and whether they are right to do so. In Experiments 1A-B, participants prescribed more optimism for someone implementing decisions than for someone deliberating, indicating that people prescribe optimism selectively, when it can affect performance. Furthermore, participants believed optimism improved outcomes when a person's actions had considerable, rather than little, influence over the outcome (Experiment 2). Experiments 3-4 tested the accuracy of this belief; optimism improved persistence, but it did not improve performance as much as participants expected. Experiments 5A-B found that participants overestimated the relationship between optimism and performance even when their focus was not on optimism exclusively. In sum, people prescribe optimism when they believe it has the opportunity to improve the chance of success-unfortunately, people may be overly optimistic about just how much optimism can do. Word count: 138Keywords: optimism, bias, accuracy, deliberation, implementation, performance 2 OPTIMISTIC ABOUT OPTIMISM Optimistic About Optimism:The Belief That Optimism Improves Performance "Optimism is faith that leads to achievement." --Helen Keller (1903, p. 67) "Wisdom is clearly to believe what one desires, for the belief is one of the indispensable preliminary conditions of the realization of its object." --William James (1882, p. 75) William James, writing in 1882, and Helen Keller, in 1903, believed that optimism leads to achievement. Empirical research has begun to explore directly whether, like them, people generally believe in the benefits of optimism. One study to tackle this question suggests that they do (Armor, Massey, & Sackett, 2008). Their participants recommended optimism over pessimism or realism in a variety of situations. People believed, in the authors' words, that "it is right to be wrong about the future." Optimism, in this view, has so much to recommend it that it is worth sacrificing accuracy for (Schneider, 2001).It would be nice if it was possible to be optimistic and accurate at the same time. But if optimism is the inclination to expect the best possible outcome, that would require the best outcome to be the most likely outcome. If people always prescribe optimism over accuracy, as Armor, Massey, and Sackett (2008) suggest, that would be remarkable because there are many advantages to being realistic. Accurate forecasts can help people decide where best to invest their limited time and money in education, recreation, social relationships, and professional opportunities (Baumeister, Campbell, Krueger, & Vohs, 2003;Forsyth, Lawrence, Burnette, & Baumeister, 2007). There is an undeniable benefit to anticipating potential risks, losses, embarrassments, and disasters. Overly optimistic entrepreneurs lose a great deal of money on businesses that fail (Balasuriya, Muradoglu, & Ayton, 2010;Camerer & Lovallo, 1999).Excessive optimism can undermine the motivation to take protective action against risks 3 OPTIMI...

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“…These could potentially include any psychological: overconfidence [49], optimism [50], hubris [28], narcissism [51], herd behavior [52], and culture heritage [53]. The literature on psychological characteristics and corporate risk-taking are shown in Table III. Behavioral decision theory suggests that hubris or overconfidence, as one type of cognitive bias, encourages decision makers to overestimate their own problem-solving capabilities [54], underestimate the resource requirements of risky initiatives [55], and underestimate the uncertainties facing their firms [56]. More importantly, people's psychological bias may generate the mode of thinking, the outlook on world, life and values which further influence one's decision-making and other behaviors.…”

Section: Psychological Bias and Risk-takingmentioning

confidence: 99%

Management Characteristics and Corporate Risk-taking: An Overall Review

Su¹,

Li²,

Wang³

2017

dteees

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Abstract. We review the literature on the relationships between management characteristics and corporate risk-taking over the period 1985~2015 and find that the two types of management characteristics: the physical characteristics and the psychological ones lead to different risk-taking behavior and firm outcomes. Generally, the physical traits have impact on taking risk by psychological bias and the psychological traits affect risk-taking behavior directly. We also find that the researchers always use the traits of CEO or top management as the proxies to explain management behaviors.

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Overconfidence and Excess Entry: An Experimental Approach

Cited by 1,724 publications

References 18 publications

When overconfidence is revealed to others: Testing the status-enhancement theory of overconfidence

When overconfidence is revealed to others: Testing the status-enhancement theory of overconfidence

(Too) optimistic about optimism: The belief that optimism improves performance.

Management Characteristics and Corporate Risk-taking: An Overall Review

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