Overconfidence might separate entrepreneurs from 'wantrepreneurs'

To be an entrepreneur you have to both think you have a better chance of success than other people and be confident about that belief
- Dr Michael Muthukrishna
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Rates of entrepreneurship are higher in some countries than others and it may be because they are generally less risk-averse and more overconfident, according to a new LSE study.

A team of researchers from LSE’s Department of Psychological and Behavioural Science in collaboration researchers from University of British Columbia, Harvard University, University of St Andrews, Curtin University, and the University of Tokyo disentangled different kinds of overconfidence to understand how it might motivate the desire to become an entrepreneur. Overconfidence can have both advantages and disadvantages in business. For example, past research shows that overconfident CEOs make poorer investment and merger decisions, but it has also found that overconfident people take on more ambitious projects, persist in the face of adversity and have better mental and physical health.

The team, led by Michael Muthukrishna, Assistant Professor of Economic Psychology, devised a new method of simultaneously measuring both overconfidence in placement (whether you think you are better than other people when you’re not) and overprecision (how confident you are in that belief). They call it the Elicitation of Genuine Overconfidence (EGO).

They conducted experiments using the EGO procedure across four populations of undergraduate students – Japanese, Hong Kong Chinese, European Canadians, and East Asian Canadians – and found significant differences between cultures and sexes. Participants took two tests: maths, where, most people know how they rank through performance in school, and empathy, which people have very little objective information about how they compare to others.

Dr Muthukrishna commented: “This research shows that you can't just assume people are overconfident because they think they're better than other people, as many other studies have done. They really might be better than other people. You have to measure it against how they really rank or perform. When you take into consideration true performance, you get very different results.”

The findings showed that when it came to the maths test, a stereotypical male domain, men, on average, looked more overconfident as they ranked themselves higher. But this disappears and even reverses with women more overconfident, because men performed better in some cases.

However, men were typically more confident in their beliefs. Whether men ranked themselves higher or lower in a test, they were typically more confident about their perceived ranking (higher overprecision).

Not only sexes, but different societies varied in overprecision, which researchers argue may help explain rates of entrepreneurship. For example, Hong Kong Chinese and Japanese showed less certainty (overprecision) in their beliefs in their own ranking and were more risk averse, particularly when money was involved.

Dr Muthukrishna explained: “To be an entrepreneur you have to both think you have a better chance of success than other people and be confident about that belief - even though most businesses fail. If you think you're better than other people, but are not confident in that belief, you're probably a "wantrepeneur" - you think about starting a business, but never pull the trigger. If you don't think you're better than other people, you're probably happy with a steady source of income.”

Overconfidence is Universal? Elicitation of Genuine Overconfidence (EGO) procedure reveals systematic differences across domain, task knowledge, and incentives in four populations is published in the latest edition of the scientific journal PLOS ONE.