Overconfidence in new start‐up success probability judgement

Abstract

Purpose The purpose of this article is to investigate the overconfidence effect on investor attitude towards new ventures investment valuation as a function of the investor involvement in estimating the venture's success probability. Design/methodology/approach The method used was experimental; econometric analysis within a prospect theory framework. Findings Participants in the role of investors are more risk seeking when they are called upon to judge success probability relative to them being offered a (reliable) success probability even when their own judgement is based on a restricted data set. Further, that investor overconfidence is a consequence of changes in risk attitude, not probability weighting. Research limitations/implications Opens up a number of issues relating to investor‐entrepreneur opportunity perception disparity and its impact on the “investment‐gap”. Considers factors that might be explored experimentally, including task confidence, investor‐entrepreneur information asymmetry and source credibility. Detailed comment made on future research directions. Practical implications Impacts on the management of communication between entrepreneurs and investors. Six management variables that might influence disparities in investor‐entrepreneur risk assessment considered in relation to findings.

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