Managerial Overconfidence of Entrepreneurs: Contextual Explanations and the Aid of Technological Developments

Chapter
First Online:

Abstract

This chapter uses budget forecasting to highlight (i) if entrepreneurs make on average inaccurate predictions, (ii) the possible drivers of inaccuracy, (iii) the managerial implication of this biased attitude. The study empirically analyzes a sample (N = 151) of a peculiar context: small and medium non-financial Italian firms. We argue that what drives inaccuracy is an overconfidence attitude. Several independent variables are collected to capture and explain the potential underlying mechanisms: individual characteristics , such as entrepreneur’s gender, age, and educational level and contextual characteristics , such as the firm’s organizational structure and the processes of administration and control. The variation between budget and final balance sheet of EBITDA, equity, and borrowing costs are used as dependent variables. We find that when entrepreneurs decide without a joint committee, biases are more pronounced. Interestingly, we show how the proper implementation of an integrated software system increases substantially forecasting accuracy. Focusing on a peculiar geographical area affected by the recent crisis, this chapter elicits for the first time overconfidence in SMEs through forecast predictions in the annual budget.

Keywords

Accuracy Overconfidence Entrepreneurs SMEs Budget Forecasting Contextual characteristics 
This is a preview of subscription content, log in to check access.

References

  1. Aaker, D. A., & Jacobson, R. (1987). The role of risk in explaining differences in profitability. Academy of Management Journal, 30, 277–296.CrossRefGoogle Scholar
  2. Alpert, M., & Howard, R. (1982). A progress report on the training of probability assessors. In D. Kahneman, P. Slovic, & A. Tversky (Eds.), Judgment under uncertainty: Heuristics and biases (pp. 294–305). Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  3. Andersen, J. (2010). A critical examination of the EO-performance relationship. International Journal of Entrepreneurial Behavior & Research, 16(4), 309–328.CrossRefGoogle Scholar
  4. Arcari, A. (2004). Prevenire la crisi e gestire il turnaround nelle PMI attraverso le analisi economiche. In Quaderni della Facoltà di Economia dell’Università dell’Insubria, 5.Google Scholar
  5. Barnes, J. (1984). Cognitive biases and their impact on strategic planning. Strategic Management Journal, 5(2), 129–137.CrossRefGoogle Scholar
  6. Baron, R. (2000). Psychological perspectives on entrepreneurship: Cognitive and social factors in entrepreneurs’ success. Current Directions in Psychological Science, 9(1), 15–18.CrossRefGoogle Scholar
  7. Basile, G., & Lusvarghi, V. (1996). Il risanamento dell’impresa in crisi, Ed. Buffetti.Google Scholar
  8. Beattie, V., McInnes, B., & Fearnley, S. (2004). A methodology for analysing and evaluating narratives in annual reports: A comprehensive descriptive profile and metrics for disclosure quality attributes. Accounting Forum, 28(3), 205–236.CrossRefGoogle Scholar
  9. Ben-David, I., Graham, J. R., & Harvey, C. R. (2008). Managerial overconfidence and corporate policies. Working Paper, Duke University.Google Scholar
  10. Bennouna, K., Meredith, G. G., & Marchant, T. (2010). Improved capital budgeting decision making: Evidence from Canada. Management Decision, 48(2), 225–247.CrossRefGoogle Scholar
  11. Beretta, S., & Bozzolan, S. (2008). Quantity vs. quality: The case of forward looking disclosure. Journal of Accounting, Auditing and Finance, 23(3), 333–375.CrossRefGoogle Scholar
  12. Biais, B., & Weber, M. (2009). Hindsight bias, risk perception, and investment performance. Management Science, 55, 1018–1029.CrossRefGoogle Scholar
  13. Blanchflower, D. (2004). Self-employment: More may not be better. Swedish Economic Policy Review, 11, 15–73.Google Scholar
  14. Blili, S., & Raymond, L. (1993). Information technology: Threats and opportunities for small and medium-sized enterprises. International Journal of Information Management, 13(6), 439–448.CrossRefGoogle Scholar
  15. Bonte, W., & Piegeler, M. (2013). Gender gap in latent and nascent entrepreneurship: Driven by competitiveness. Small Business Economics, 41(4), 961–987.CrossRefGoogle Scholar
  16. Busenitz, L., & Barney, J. (1994). Biases and heuristics in strategic decision making: Differences between entrepreneurs and managers in large organizations. Academy of Management Best Papers Proceedings (pp. 85–89).Google Scholar
  17. Busenitz, L., & Barney, J. (1997). Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making. Journal of Business Venturing, 12, 9–30.CrossRefGoogle Scholar
  18. Camerer, C., & Lovallo, D. (1999). Overconfidence and excess entry: An experimental approach. American Economic Review, 89(1), 306–318.CrossRefGoogle Scholar
  19. Campra, M., Finessi, E., & Passarani, D. A. (2011). Financial distress and going concern disclosure: The case of Italian listed companies. International Journal of Revenue Management, 5(4), 308–324.CrossRefGoogle Scholar
  20. Carlsson, B. (2005). Universities, entrepreneurship and public policy: Lessons from abroad. In S. Shane (Ed.), Economic development through entrepreneurship: Government, university and business linkages (pp. 204–213). Cheltenham: Edward Elgar.Google Scholar
  21. Cassar, G., & Gibson, B. (2007). Forecast rationality in small firms. Journal of Small Business Management, 45(3), 283–302.CrossRefGoogle Scholar
  22. Castaldi, R., & Wortman, M. S. (1984). Board of directors in small corporations: An untapped resource. American Journal of Small Business, 9(2), 1–11.Google Scholar
  23. Cerved. (2013). Osservatorio su fallimenti, procedure e chiusure di imprese. Retrieved from http://www.cervedgroup.com/documents/10156/105548/DomandeInBianco_Maggio2013.pdf.
  24. Chiao, Y.-C., Yang, K.-P., & Yu, C.-M. J. (2006). Performance, internationalization, and firm-specific advantages of SMEs in a newly-industrialized economy. Small Business Economics, 26, 475–492.CrossRefGoogle Scholar
  25. Coda, V. (1987). Le tappe critiche per il successo dei processi di ristrutturazione aziendale. In A.A.V.V., Crisi d’impresa e strategie di risanamento, Giuffrè editore (pp. 5–6).Google Scholar
  26. Cooper, A. C., Woo, C. A., & Dunkelberg, W. (1988). Entrepreneurs perceived chances for success. Journal of Business Venturing, 3, 97–108.CrossRefGoogle Scholar
  27. Cooper, A., Gascon, J., & Woo, C. (1991). A resource-based prediction of new venture survival and growth. In Proceedings Academy of Management (Summer) (pp. 113–119).Google Scholar
  28. Dawson, C., & Henley, A. (2012). Over-optimism and entry and exit from self-employment. International Small Business Journal, 31(8), 938–954.Google Scholar
  29. De Meza, D., & Southey, C. (1996). The borrower’s curse: Optimism, finance and entrepreneurship. The Economic Journal, 106, 375–386.Google Scholar
  30. Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77, 35–59.CrossRefGoogle Scholar
  31. Diamantopoulos, A., & Winklhofer, H. (1999). The impact of firm and export characteristics on the accuracy of export sales forecast: Evidence from UK exporters. International Journal of Forecasting, 15, 67–81.CrossRefGoogle Scholar
  32. Einhorn, H. J., & Hogarth, R. M. (1978). Confidence in judgment: Persistence of the illusion of validity. Psychological Review, 85(5), 395–416.Google Scholar
  33. Fink, D. (1998). Guidelines for the successful adoption of information technology in small and medium enterprises. International Journal of Information Management, 18(4), 243–253.CrossRefGoogle Scholar
  34. Forbes, D. P. (2005). Are some entrepreneurs more overconfident than others? Journal of Business Venturing, 20, 623–640.CrossRefGoogle Scholar
  35. Forbes, D. P., & Milliken, F. J. (1999). Cognition and corporate governance: Understanding boards of directors as strategic decision-making groups. Academy of Management Review, 24(3), 489–505.Google Scholar
  36. Frost, C. A. (1997). Disclosure policy choices of UK firms receiving modified audit reports. Journal of Accounting and Economics, 23, 163–187.CrossRefGoogle Scholar
  37. Garland, H., Sandefur, C., & Rogers, A. (1990). Do-escalation of commitment in oil exploration: When sunk losses and negative feedback coincide. Journal of Applied Psychology, 75, 721–727.CrossRefGoogle Scholar
  38. Gervais, S., Heaton, J. B., & Odean, T. (2011). Overconfidence, compensation contracts, and capital budgeting. The Journal of Finance, 66(5), 1735–1777.CrossRefGoogle Scholar
  39. Grant, R. M., Jammine, A. P., & Thomas, H. (1988). Diversity, diversification and profitability among British manufacturing companies 1972–1984. Academy of Management Journal, 31, 771–801.CrossRefGoogle Scholar
  40. Gunasekaran, A., Love, P., Rahimi, F., & Miele, R. (2001). A model for investment justification in information technology projects. International Journal of Information Management, 21, 349–364.CrossRefGoogle Scholar
  41. Hagestad, G., & Neugarten, B. (1985). Age and the life course. In R. Binstock & E. Shanas (Eds.), Handbook of aging and the social sciences. New York: Van Nostrand Reinhold.Google Scholar
  42. Hamilton, B. H. (2000). Does entrepreneurship pay? An empirical analysis of the returns to self-employment. Journal of Political Economy, 97, 808–827.Google Scholar
  43. Hayward, M. L. A., Shepherd, D. A., & Griffin, D. (2006). A hubris theory of entrepreneurship. Management Science, 52, 160–172.CrossRefGoogle Scholar
  44. Heinonen, J., & Poikkijoki, S. A. (2006). An entrepreneurial-directed approach to entrepreneurship education: Mission impossible? Journal of Management Development, 25(1), 80–94.CrossRefGoogle Scholar
  45. Hisrich, R. D., & Szimal, P. (1993). Developing a market oriented economy: A hungarian perspective. Entrepreneurship and Regional Development Journal, 5(1), 61–71.CrossRefGoogle Scholar
  46. Hope, O. K. (2003). Disclosure practices, enforcement of accounting standards, and analysts’ forecast accuracy: An international study. Journal of Accounting Research, 41(2), 235–272.CrossRefGoogle Scholar
  47. Hormiga, E., Hancock, C., & Valls-Pasola, J. (2013). The relationship between employee propensity to innovate and their decision to create a company. Management Decision, 51(5), 938–953.CrossRefGoogle Scholar
  48. Iacovou, C., Benbasat, I., & Dexter, A. (1995). Electronic data interchange and small organisations: Adoption and impact of technology. Management Information Systems Quarterly, 19(4), 465–485.CrossRefGoogle Scholar
  49. Johannisson, B., & Huse, M. (2000). Recruiting outside board members in the small family business: An ideological challenge. Entrepreneurship & Regional Development, 12, 353–378.CrossRefGoogle Scholar
  50. Karlsson, N., Juliusson, E. A., & Gärling, T. (2005). A conceptualization of task dimensions affecting escalation of commitment. European Journal of Cognitive Psychology, 17, 835–858.CrossRefGoogle Scholar
  51. Keh, H., Foo, M., & Lim, B. (2002). Opportunity evaluation under risky conditions: The cognitive processes of entrepreneurs. Entrepreneurship Theory and Practice, 27(2), 125–148.CrossRefGoogle Scholar
  52. Koellinger, P., Minniti, M., & Schade, C. (2007). I think I can, I think I can: Overconfidence and entrepreneurial behavior. Journal of Economic Psychology, 28(4), 502–527.CrossRefGoogle Scholar
  53. Kolb, C., & Wagner, M. (2015). Crowding in or crowding out: The link between academic entrepreneurship and entrepreneurial traits. The Journal of Technology Transfer, 40(3), 387–408.CrossRefGoogle Scholar
  54. Koller, T., Goedhart, M., & Wessels, D. (2005). Valuation: Measuring and managing the value of companies (4th ed.). New Jersey: Wiley.Google Scholar
  55. Kropp, F., Lindsay, N. J., & Shoham, A. (2008). Entrepreneurial orientation and international entrepreneurial business venture startup. International Journal of Entrepreneurial Behaviour & Research, 14(2), 102–117.CrossRefGoogle Scholar
  56. Levesque, M., & Minniti, M. (2006). The effect of aging on entrepreneurial behavior. Journal of Business Venturing, 21(2), 177–194.Google Scholar
  57. Lipton, D., & Sachs, J. (1990). Privatization in Eastern Europe: The case of Poland. Brookings Paper on Economic Activity, 2, 293–333.CrossRefGoogle Scholar
  58. Lovallo, D., & Kahneman, D. (2003). Delusions of success: How optimism undermines executives’ decisions. Harvard Business Review, 81(7), 56–63.Google Scholar
  59. Lowe, E. A., & Shaw, R. W. (1970). The accuracy of short-term business forecasting: An analysis of a firm’s sales budgeting. The Journal of Industrial Economics, 18(3), 275–289.CrossRefGoogle Scholar
  60. Lussier, R. N., & Pfeifer, R. (2001). A crossnational prediction model for business success. Journal of Small Business Management, 39(3), 228–239.CrossRefGoogle Scholar
  61. Malmendier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the market’s reaction. Journal of Financial Economics, 89(1), 20–43.CrossRefGoogle Scholar
  62. Marlow, S., & McAdam, M. (2013). Gender and entrepreneurship: Advancing debate and challenging myths; Exploring the mystery of the under-performing female entrepreneur. International Journal of Entrepreneurial Behaviour & Research, 19(1), 114–124.CrossRefGoogle Scholar
  63. Moehrle, S., Reynolds-Moehrle, J., & Wallace, J. (2003). Dining at the earnings buffet. Harward Business School Publishing—Business Horizons.Google Scholar
  64. Moore, D. A., & Kim, T. G. (2003). Myopic social prediction and the solo comparison effect. Journal of Personality and Social Psychology, 85(6), 1121–1135.CrossRefGoogle Scholar
  65. Morrell, M., & Ezingeard, J. N. (2002). Revisiting adoption factors of inter-organisational information systems in SMEs. Logistics Information Management, 15(1), 46–57.Google Scholar
  66. Mutchler, J. F., Hopwood, W., & McKeown, J. M. (1997). The influence of contrary information and mitigating factors on audit opinion decisions on bankrupt companies. Journal of Accounting Research, 35, 295–310.CrossRefGoogle Scholar
  67. Ogbonna, E., & Harris, L. C. (2005). The adoption and use of information technology: A longitudinal study of a mature family firm. New Technology, Work and Employment, 20(1), 1–18.CrossRefGoogle Scholar
  68. Panizza, A. (2011). Il controllo in tempo di crisi e dopo la crisi: spunti per il monitoraggio delle PMI. In Controllo di Gestione, 6, 6–12.Google Scholar
  69. Paulhus, D. L. (1998). Interpersonal and intrapsychic adaptiveness of trait self-enhancement: A mixed blessing? Journal of Personality and Social Psychology, 74, 1197–1208.Google Scholar
  70. Peng, M. W., & Hearth, P. S. (1996). The growth of the firm in planned economies in transition: Institutions, organizations, and strategic choice. Academy of Management Review, 21, 492–528.Google Scholar
  71. Politis, D., & Gabrielsson, J. (2009). Entrepreneurs’ attitudes towards failure. An experiential learning approach. International Journal of Entrepreneurial Behaviour & Research, 15(4), 364–383.CrossRefGoogle Scholar
  72. Porter, M. E. (1998). Clusters and the new economics of competition. Harvard Business Review, November–December.Google Scholar
  73. Reynolds, P. (1987). New firms: Societal contribution versus potential. Journal of Business Venturing, 3, 231–246.CrossRefGoogle Scholar
  74. Reynolds, P., Autio, E., & Hay, M. (2003). Global entrepreneurship monitor report. Kansas City, MO, US: E. M. Kaufmann Foundation.Google Scholar
  75. Robins, J. A., & Wiersema, M. F. (1995). A resource-based approach to the multibusiness firm: Empirical analysis of portfolio interrelationships and corporate financial performance. Strategic Management Journal, 16(4), 277–299.CrossRefGoogle Scholar
  76. Ross, J., & Staw, B. M. (1986). Expo 86: An escalation prototype. Administrative Science Quarterly, 31(2), 274–297.CrossRefGoogle Scholar
  77. Russo, J., & Staw, B. M. (1993). Organizational escalation and exit: Lessons from the Shoreham Nuclear Power Plant. Academy of Management Journal, 36(4), 701–732.CrossRefGoogle Scholar
  78. Russo, E., & Schoemaker, P. (1992). Managing overconfidence. Sloan Management Review, 33, 2.Google Scholar
  79. Sautner, Z., & Weber, M. (2009). How do managers behave in stock option plans? Clinical evidence from exercise and survey data. Journal of Financial Research, 32(2), 123–155.CrossRefGoogle Scholar
  80. Sharma, P., Chrisman, J. J., & Chua, J. H. (1997). Strategic management of the family business: Past research and future challenges. Family Business Review, 10, 1.CrossRefGoogle Scholar
  81. Shepherd, D. A., Wiklund, J., & Haynie, J. M. (2009). Moving forward: Balancing the financial and emotional costs of business failure. Journal of Business Venturing, 24, 134–148.CrossRefGoogle Scholar
  82. Shumway, T. (2001). Forecasting bankruptcy more accurately: A simple hazard model. Journal of Business, 74(1), 101–124.CrossRefGoogle Scholar
  83. Simon, M., Houghton, S. M., & Aquino, K. (2000). Cognitive biases, risk perception, and venture formation: How individuals decide to start companies. Journal of Business Venturing, 15(2), 113–134.CrossRefGoogle Scholar
  84. Tipu, S. A., & Arain, F. M. (2011). Managing success factors in entrepreneurial ventures: A behavioral approach. International Journal of Entrepreneurial Behaviour & Research, 17(5), 534–560.CrossRefGoogle Scholar
  85. Uang, J. Y., Criton, D., Sudarsanam, S., & Taffler, R. (2006). Management going-concern disclosures: Impact of corporate governance and auditor reputation. European Financial Management, 12(5), 789–816.CrossRefGoogle Scholar
  86. Ucbasaran, D., Westhead, P., Wright, M., & Flores, M. (2010). The nature of entrepreneurial experience, business failure and comparative optimism. Journal of Business Venturing, 25(6), 541–555.CrossRefGoogle Scholar
  87. Watkins, D., & Shen, Y. (1997). Criteria for board construction in the entrepreneurial firm. Paper presented at the XI Research in Entrepreneurship and Small Business (RENT XI) Conference, Mannheim, Germany, 26–29 November.Google Scholar
  88. Welter, F., & Smallbone, D. (2008). Women’s entrepreneurship from an institutional perspective: The case of Uzbekistan. International Entrepreneurship and Management Journal, 4, 505–520.CrossRefGoogle Scholar
  89. Wright, M., & Stigliani, I. (2012). Entrepreneurship and growth. International Small Business Journal, 31(1), 3–22.CrossRefGoogle Scholar
  90. Yap, C. S., Soh, C. P. P., & Raman, K. S. (1992). Information systems success factors in small business international. Journal of Management Science, 20, 597–609.Google Scholar
  91. Yardanova, D. I., & Boshnakova, M. I. A. (2011). Gender effects on risk-taking of entrepreneurs: Evidence from Bulgaria. International Journal of Entrepreneurial Behaviour & Research, 17(3), 272–295.CrossRefGoogle Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  1. 1.University of Eastern Piedmont Amedeo AvogadroNovaraItaly

Personalised recommendations