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This paper develops a hubris theory of entrepreneurship to explain why so many new ventures are created in the shadow of high venture failure rates: More confident actors are moved to start ventures, and then act on such confidence when deciding how to allocate resources in their ventures. Building on theory and evidence from the behavioral decision-making literature, we describe how founders' socially constructed confidence affects the manner in which they interpret information about their prior and current ventures. We then link founders' propensity to be overconfident to their decisions to allocate, use, and attain resources. In our model, founders with greater socially constructed confidence tend to deprive their ventures of resources and resourcefulness and, therefore, increase the likelihood that their ventures will fail.
Key words: confidence; hubris; entrepreneurship; resources
History: Accepted by Scott Shane, guest editor; received March 31, 2004. This paper was with the authors 3 ½ months for 3 revisions.
Introduction
"Looking back on it, my judgment was often terribly wrong,'' said one entrepreneur who had burned through more than $20 million trying to launch a Web-based business. "Unfortunately, I was never in doubt." (Kramer 2003, p. 63)
A good theory of entrepreneurship should explain the supply of ventures, which depends on the formation of new ventures and the exit, including failure, of existing ones. It is puzzling and intriguing that so many ventures start in the presence of the alarmingly high rates of venture failure (e.g., 574,300 firms were started, or made their first sale, in the United States in 2000; see Shook et al. 2003).1 Data from the U.S. Census Bureau's Business Information Tracking Series shows that of the ventures started between 1989 and 1992, 34% did not survive the first two years, 50% did not survive four years, and 60% did not survive six years (Headd 2003; see also Phillips and Kirchhoff 1989 for similar results). These data are consistent with plant-level data from the U.S. Census of Manufacturers that up to 62% and 80% of all new chemistry industry plants exited within 5 and 10 years of starting, respectively, with most exits being failures (Dunne et al. 1989).
Why and when do founders form these ventures in the presence of such failure rates?2 A hubris theory of...