Overconfident Entrepreneurs: A Study of Kauffman Firm Survey

We identified overconfident (OC) entrepreneurs, who believed to have comparative advantage over industry peers while their ventures average ROA during the first 4 years was lower than the industry median. In subsequent years, those overconfident entrepreneurs (OCEs) invest more in human capital (in total payroll and average pay) and innovation (R&D), and produce more patents and new products/processes than non-OC counterparts. OCEs, however, are hesitant to seek external funding (i.e., didn t apply for loan in fear of rejection) although their credit risk is not different from non-OC owners. Hence, OC owners resort to the close networks of their family and friends for funding. By definition, OCEs started with lower ROA, but change in ROA is (insignificantly) better than non-OC entrepreneurs. Also, OCE s venture hazard rate is no worse than that of non- OC entrepreneurs. Since OC entrepreneurs add value to the economy through investment in human capital and innovation, policy makers should better support their ventures by lessening their resource constraints through proactive funding opportunities.