Why are all new entrepreneurs better than average? Evidence from subjective failure rate expectations

There is considerable consensus in the literature that entrepreneurs are prone to unrealistic optimism. Our new field evidence from a sample of four-month-old start-ups echoes this finding: as many as 87% of new entrepreneurs expect to survive at least three years in business, whereas the actual statistical survival rate is around 60%. Our field study allows us to rule out certain previously overlooked explanations for the often-documented optimistic bias in new entrepreneurs’ judgment: It is not due to a framing effect nor driven by rash and sloppy survey responses by busy entrepreneurs. Nor can we relate it to the risk preferences of entrepreneurs or to a difficulty in understanding algebra of probability. We also study how entrepreneurs update their failure rate expectations: When prompted to rethink, 33% of the entrepreneurs update their risk beliefs. We reject the formal restrictions of a Bayesian learning model, in part because of the presence of optimistic entrepreneurs. entrepreneurship, new firms, default, expectations, survival