The changing form of overconfidence and its effect on growth expectations at the early stages of startups

Abstract

In this article, we attempt to explain the failure of many studies to show a link between entrepreneurs’ beliefs in their entrepreneurial skills and the actual or expected growth of their venture. By using Frese and Gielnik’s action-characteristics model of entrepreneurship as an analytical framework and analyzing Global Entrepreneurship Monitor Adult Population Survey data, we show that entrepreneurs’ perceived entrepreneurial skills are consistently inflated over the different phases of the startup, albeit in different ways. Depending on the typical form of overconfidence, the link between skill beliefs and growth expectations may be mediated by expectations about competitive advantages. Moreover, the huge drop in growth expectations is not associated with a drop in perceived skills; instead other entrepreneurial expectations also become more realistic and their effect strengthens with experience.