Journal Article10.1108/13552550610679168
Overconfidence in new start‐up success probability judgement
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TL;DR: In this paper, the authors investigate the overconfidence effect on investor attitude towards new ventures investment valuation as a function of the investor involvement in estimating the venture's success probability, and conclude that investor overconfidence is a consequence of changes in risk attitude, not probability weighting.
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Abstract: – The purpose of this article is to investigate the overconfidence effect on investor attitude towards new ventures investment valuation as a function of the investor involvement in estimating the venture's success probability., – The method used was experimental; econometric analysis within a prospect theory framework., – Participants in the role of investors are more risk seeking when they are called upon to judge success probability relative to them being offered a (reliable) success probability even when their own judgement is based on a restricted data set. Further, that investor overconfidence is a consequence of changes in risk attitude, not probability weighting., – Opens up a number of issues relating to investor‐entrepreneur opportunity perception disparity and its impact on the “investment‐gap”. Considers factors that might be explored experimentally, including task confidence, investor‐entrepreneur information asymmetry and source credibility. Detailed comment made on future research directions., – Impacts on the management of communication between entrepreneurs and investors. Six management variables that might influence disparities in investor‐entrepreneur risk assessment considered in relation to findings.
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References
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TL;DR: In this article, the authors proposed a model, called venture theory, of how people assess decision weights, which is assumed that people first anchor on a stated probability and then adjust this by mentally simulating other possible values.
Estimating utility functions in the presence of response error
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Frank H. Knight
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TL;DR: In Risk, Uncertainty and Profit, Frank Knight explored the riddle of profitability in a competitive market profit should not be possible under competitive conditions, as the entry of new entrepreneurs would drive prices down and nullify margins, however evidence abounds of competitive yet profitable markets as mentioned in this paper.
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