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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2014:1:
The Bright but Right View? New Evidence on Entrepreneurial Optimism

Ola Bengtsson and Daniel Ekeblom ()

Abstract: Existing empirical evidence suggest 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 future economic conditions. These beliefs form a good measure of optimism because they, unlike an individualís beliefs about her own future economic conditions, are completely uncorrelated with the individualís own life or work situation (which is not optimism). 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 to its conceptual and empirical relevance, 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 first show that entrepreneurs have more favorable beliefs about nationwide conditions. We then show 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)

36 pages, January 8, 2014

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