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Research Institute of Industrial Economics (IFN) Working Paper Series

No 1008:
The Bright but Right View? A New Type of Evidence on Entrepreneurial Optimism

Ola Bengtsson and Daniel Ekeblom

Abstract: Existing empirical evidence suggests that entrepreneurs are optimists, a finding researchers often interpret as evidence of a behavioral bias in entrepreneurial decision-making. We revisit this claim by analyzing an unusually large survey dataset (180,814 responses) that allows us to create a good measure of entrepreneurial optimism. Our measure is based on the individualís beliefs about nationwide economic conditions, unlike measures that prevail in the literature of an individualís beliefs about her personal future economic conditions. Beliefs about nationwide economic conditions form a good measure of optimism because they are completely uncorrelated with the individualís own life or work situation (which is not optimism) and therefore do not respond to an individualís objective situation, which may affect beliefs about her personal future economic conditions. Our data highlight the importance of measuring optimism correctly. About half of the survey respondents differ in their beliefs about nationwide and own conditions. In addition, our measure of optimism makes it possible to relate an individualís beliefs to actual outcomes. We can thereby test, in a novel way, whether entrepreneurial optimism is a behavioral bias or not. We show that entrepreneurs have more favorable beliefs about nationwide conditions and then that these entrepreneursí beliefs are relatively good predictors of the future. We conclude from these two findings that entrepreneurs are less biased towards optimism than non-entrepreneurs are biased towards pessimism. Additional evidence pertaining to education, which arguably correlates positively with rational decision-making, supports this conclusion. We show that entrepreneurs are more educated and their beliefs about the future are more similar to educated peoplesí beliefs. In summary, our paper documents that entrepreneurial optimism is an important real-world phenomenon, yet, it may not be a behavioral bias that gives rise to irrational decision-making.

Keywords: Entrepreneurship; Forecast; Optimism; Survey data; (follow links to similar papers)

JEL-Codes: C83; D84; E27; L26; (follow links to similar papers)

35 pages, February 19, 2014

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