EXPLAINING THE AMBIGUOUS IMPACT OF OVERCONFIDENCE ON CORPORATE DECISION-MAKING: A CRITIQUE OF THE RESEARCH METHODOLOGY
Languages of publication
Prior entrepreneurship research shows that individuals often possess biased expectations regarding their chances of success in the market compared to objective reality, as well as to their success and profitability compared to their peers. The present study addresses the effect of overconfidence on corporate decision-making with regard to the methodology used in economic and psychological studies. Current research provides contradictory and inconclusive results about the effect of overconfidence on various Chief Executive Officers’ decisions and profitability. In this study, the author tries to explain this inconclusiveness by outlining some of the most important methodological issues in the overconfidence research. Overconfidence can be defined as a systematic tendency to overestimate one’s own ability to make accurate forecasts, or as an overestimation of one’s own performance, or knowledge, compared to his/her actual performance, or others’ knowledge. In this paper, he describes, firstly, the origins and differences in operationalization between economic and psychology studies. Several widely-used measures and proxies of overconfidence in economic research are described and the diversity of using these measures in previous studies is showed. Subsequently, he discusses how different forms of overconfidence impact the decision-making and performance of entrepreneurs. In this part, the study focuses on the three most frequent areas that are reflected in the current literature; namely the effect of overconfidence on financial decision-making, firm profitability, and entrepreneurs’ innovativeness. The final part of the study outlines several possible ways how problems with methodology and inconclusiveness in the overconfidence research could be solved.
1 - 15
Publication order reference