Development and validation of a scale to assess overconfidence in small business decision making

Abstract

This study aims to develop and validate a scale to assess overconfidence bias in small business owners’ decision making. Based on the dimensions of overprecision, overplacement, and overestimation, the instrument was constructed through literature review, qualitative interviews, and refined via pretesting. An exploratory factor analysis (N = 398) revealed a two-factor structure—overprecision and overestimation— where the latter merges overplacement and overestimation. A confirmatory factor analysis (N = 100) confirmed the model’s robustness. The resulting 15-item scale demonstrated strong reliability and sound psychometric properties. Overconfidence was found to manifest through overly precise estimates and inflated self-perceptions relative to peers. The study also introduces three indicators—IOmate, IOcision, and IOconf—to measure the intensity of this bias. This scale provides a context-specific tool to support entrepreneurs, consultants, and policy makers in identifying and addressing overconfidence in managerial decisions, contributing to improved strategic choices and reduced decision-making risks in small business environments.

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