Entrepreneur overconfidence bias: who is most wrong.
Entrepreneur overconfidence bias means the confident founder, not the frightened one, often needs checking most. Studies found people focus on their own skills and forget their rivals. So the outside view, how similar projects really turned out, usually corrects a bold forecast.
The market game that lured too many players.
In 1999, Colin Camerer and Dan Lovallo published a market entry game in the American Economic Review. Too many entrants meant losses. Yet more people entered when payment depended on their own skill ranking rather than chance. They forgot that everyone else was thinking the same way. Camerer and Lovallo called this reference group neglect.
Your plan's story against everyone else's results.
In 1993, Daniel Kahneman and Lovallo described the inside view vs outside view in Management Science. The inside view looks at your plan's details: customers, your break-even month, why you are different. Meanwhile, the outside view asks how projects like yours actually turned out. Because the inside view makes forecasts bold, the outside view is usually more accurate.
Entrepreneur overconfidence bias in real founders.
Koellinger, Minniti and Schade used Global Entrepreneurship Monitor surveys from 18 countries in 2007. Confidence in one's own skills strongly predicted starting a business. Also, higher confidence went with lower survival chances for new businesses. However, that is a country pattern, so treat it as a hint. Similarly, Moore, Oesch and Zietsma found entrants watched their own abilities more than rivals' strength.
Test your own entrepreneur overconfidence bias.
Hand your plan to someone with no stake in it and ask what worries them.
Then write whether their fear seems bigger or smaller than yours, and why.
Questions about entrepreneur overconfidence bias.
How do I spot entrepreneur overconfidence bias in myself?
Ask whether a stranger reading your plan would be more worried than you. If so, your confidence needs checking first.
Is the outside view always right?
Not always, but Kahneman and Lovallo said it is usually more accurate than the inside view.
What should a cold, specific doubt tell me?
It may be the outside view trying to get a word in, so take it seriously.
Read the whole chapter.
This lesson covers one section of chapter 7, “When the coward is right”. The book goes further, with the full evidence, the stories and every exercise.
Lessons in this chapter.
- 01 Knowing when to quit a startup: why it is a skill.
- 02 Entrepreneur overconfidence bias: who is most wrong.
- 03 Scientific method for startups: let evidence decide.
- 04 Business closure rate in my area: count it yourself.
- 05 Aquinas on courage: why too little fear is a mistake.
- 06 Find closed businesses on maps: fixing bad counts.
- 07 When to abandon a business idea: a four-second lesson.