Too Much or Too Little Faith in Success? Experimental Evidence from Colombian Entrepreneurs

Abstract

The high failure rate of new businesses in Colombia suggests a high entry rate among entrepreneurs with only low success potential. We test the hypothesis that this may be driven by the tendency to incorrectly estimate their success likelihoods. Specifically, we test the relative roles of ambiguity preferences, confidence, and optimism and whether there are heterogeneities in these biases with regard to the underlying potential of entrepreneurs. We recruit Colombian entrepreneurs to participate in an online experiment that simulates their entry decision through an in-survey game and we vary the information available to participants to disentangle the potential behavioral biases leading to over-entry. We find that information about (i) the average likelihood of success encourages the lower potential participants to enter more, (ii) individual-specific skills discourages some lower potential individuals, and (iii) the role of luck also seems discourage lower potential participants. Taken together, the findings show that overconfidence and not optimism among the lower potential generates over-entry in this group, but the resulting high failure rate does not deter high-potential individuals.