Experimental studies on entrepreneurial idea generation, confidence, and investment decisions
AbstractWe present results of two completed studies, and experimental designs and predictions for two additional studies, all of which are focused on entrepreneurial decision making, and specifically on entrepreneurs’ confidence, predictions, and investment decisions. The two completed experiments employ a novel paradigm in which participants engage in generation of, and potentially investment in, an entrepreneurial idea. We found that individuals who generate a business idea form biased evaluations of economic potential of ideas. They are overconfident about the value of, and overly likely to invest in, their own idea, but, when they have proposed their own idea, are underconfident about the value of, and insufficiently likely to invest in ideas proposed by other people. Research subjects who have the opportunity to invest in another person’s idea, but have not proposed their own idea, are neither over- nor under-confident. In addition, we found that the threat that another investor can appropriate a declined investment opportunity increases willingness to invest.
The first in-process experiment further explores factors that impact confidence and performance of entrepreneurs in generating ideas. Participants proposed ideas, either individually or jointly and then forecast the amount of investment they believe their ideas would receive from a group of investors. We predict that collaborative idea generation yields more promising ideas than competitive idea generation, but also adds to idea generators’ tendency to overestimate the promise of the idea.
The second, planned, experiment examines the impact of a policy intervention on choosing between generating entrepreneurial ideas collaboratively versus individually. While collaborating with others in generating an entrepreneurial idea is likely to result in more promising ideas, individual’s decisions about whether to collaborate may not optimally reflect expected advantages of collaboration. The experiment is an attempt to investigate the presence of such a suboptimal pattern of collaboration in idea generation, and explores whether a policy intervention has the potential to shift the amount of collaboration in idea generation in a way that results in creation of more promising ideas.