A Study On The Relationship Between Entrepreneurial Overconfidence And Entrepreneurial Performance

Accompanying the global financial crisis and economic downturn, the Chinese market isexperiencing changes. The traditional Chinese manufacture model has been constrained by human, land,energy and environmental factors, which urgently require innovation and entrepreneurship to maintainthe country’s fast and sustainable economic growth and industrial transformation. Though in recentyears, entrepreneurial activities have been very active in China, the failure rate is above70%forChinese entrepreneur firms. The average lifespan of new firms is less than three years, and70%of thenew firms cannot survive the first year. In contrast, in developed economies,35%of the new firms failin the first year, and30%survive for more than five years. Though entrepreneurs devoted all theirresources and energy in their firms, success has only been a small probability event. Academics andpractisioners have not reached consensus regarding whether there are commonalities for success.These phenomena have posed new issues and challenges for us to research on the behavior ofentrepreneurs.This study examines the characteristics of overaconfidence (i.e., over-value the future outcomes) ofentrepreneurs, which may be one of the key reasons for their persistence. Although studies show thatthe irrational behavior can be the main reason for a high failure rate of the business (Hayward et al.,2006), overconfidence may increase the chance of innovation, and moreover some enterpreneurs’success may bring about important “extraordinary innovation”. Thus in this study, we try to answer thefollowing key questions: what influences the entrepreneur’s overconfidence? How to define the optimallevel of overconfidence? How does overconfidence affect entrepreneurial performance?This study will examine three main issues: firstly, I explore the main elements for entrepreneurialoverconfidence. I look at irrationality of overconfidence, and multiple factors of overconfidence.Secondly, I examine the relationship between overconfidence and enterpreneurial performance.Thirdly,based on the above discussion, I present empirical findings, and discuss practical implications.This study makes a thorough and systematic overview of relevant theories. It shows the researchstatus in overconfidence and entrepreneurial performance of domestic and foreign entrepreneurs, andthe existing issues, and further poses the research questions and suggests the research methods. Then,this study integrates qualitative and quantitative methods, and analyzes the data. The main contents andconclusionsare the following:Firstly, I construct a conceptual model/framework of the relationship between overconfidence andentrepreneurial performance, using the concepts of entrepreneurial irrationality, characteristics of overconfidence, entrepreneurial capabilities and the external environment. I suggest thatentrepreneurial capabilities are the mediator connecting overconfidence and entrepreneurialperformance, and this relationship is moderated by the external environment.Secondly, I discuss overconfidence and entrepreneurial performance from the perspective of gametheory. I use behavioral game theory to explore the best level of overconfidence.Thirdly, based on secondary data of entrepreneurial activities in Shanghai, I find relationshipsbetween the main factors. Specifically, I find that overconfidence has a partial effect on entrepreneurialperformance, entrepreneurial capabilities partially mediate that effect, and the external environmentpartially moderates the effect of overconfidence on entrepreneurial performance.Finally, based on the empirical evidence, I discuss the relevance and usefulness of the hypotheses inthis study, in particular, what are the determinants of success in an entrepreneurial activity.This study finds that overconfidence is prevalent among entrepreneurs, but it differs depending onthe difficulty of new venture and the individual. Overconfidence among successors is lower thanamong failures. So there is a best level of overconfidence. When around the best level, the entrepreneurcan both have the courage to create the new venture and avoid overconfidence leading to failure.This research finds that there is not an absolute significant effect between overconfidence andentrepreneurial performance. I find that slow adaption has a direct effect on entrepreneurialperformance, imprecise adaption has a partial effect, and poor memory has no effect. This indicates thatthe entrepreneur is more likely to succeed when slow adaptation and imagination beyond the normalare present.This research finds that experiencial learning has a positive impact on entrepreneurial performance.This indicates that early experience and latter learning is indispensible. It is benefitial foroverconfidence improvement when the entrepreneur can utilize his/her social network.This study makes the following contributions. By extending and developing the C&L experiment,this study examines constructs such as entrepreneurial irrationality, overconfidence, entrepreneurialability and external environment. It also examines the interaction effect of overconfidence and themarket entry decision; This study looks critically at some popular opinions in the business media thatgives emphasis on high adaptation, high flexibility and fast learning. I review traditional wisdom of theChinese culture, and emphasize that overconfidence, which includes slow adaptation, impreciseadaptation, and poor memory, is critical to long-term social prosperity.Practically, it contributes to:(1) entrepreneurial management. Understanding the causes of individual irrationality can help the entrepreneurs to be more effective in reviewing whether they are"overconfident", and thus increasing their chance of success;(2) venture capital management.Understanding the causes of individual irrationality can help venture capital organizations and venturecapitalists to better assess the likelihood of success of a venture project, and give appropriate advice toindividual projects;(3) science and technology policy. Understanding the casuses of the optimal levelof social irrationality can facilitate the government of all levels to formulate appropriate technologypolicies in order to achieve a higher level of social welfare.