Overconfidence in new start-up success probability judgement

Abstract: Purpose – The purpose of this article is to investigate the overconfidence effect on investor attitude towards new ventures investment valuation as a function of the investor involvement in estimating the venture's success probability.
Design/methodology/approach – The method used was experimental; econometric analysis within a prospect theory framework.
Findings – Participants in the role of investors are more risk seeking when they are called upon to judge success probability relative to them being offered a (reliable) success probability even when their own judgement is based on a restricted data set. Further, that investor overconfidence is a consequence of changes in risk attitude, not probability weighting.
Research limitations/implications – Opens up a number of issues relating to investor-entrepreneur opportunity perception disparity and its impact on the “investment-gap”. Considers factors that might be explored experimentally, including task confidence, investor-entrepreneur information asymmetry and source credibility. Detailed comment made on future research directions.
Practical implications – Impacts on the management of communication between entrepreneurs and investors. Six management variables that might influence disparities in investor-entrepreneur risk assessment considered in relation to findings.