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The Handbook of Technology and Innovation Management by Scott Shane

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13.1. New Venture Origins

The recent literature has underscored the proposition that entrepreneurial opportunities are ephemeral and transitory (e.g., Shane and Venkataraman, 2000), and so such windows of opportunity can open and shut over time. This structure, coupled with the high rate of entrant failures (e.g., Dunne, Roberts, and Samuelson, 1988), has led some researchers to ask whether entrepreneurial entry is economically rational, or in the alternative, entrepreneurs exhibit over-optimism and/or mis-perceived risk (e.g., Camerer and Lovallo, 1999; Moskowitz and Vissing-Jorgenson, 2002). In an early study, Cooper et al. (1988) found that 68% of their surveyed entrepreneurs thought that the odds of their business succeeding was better than other businesses similar to theirs (only 5% thought their odds were worse). Camerer and Lovallo (1999) find that their experimental subjects accurately forecast negative industry profits and enter anyway, and Moskowitz and Vissing-Jorgenson (2002) find that private equity returns do not seem to offer a premium to public equity. Although these three studies offer evidence from three methods (survey-based, experimental, and empirical) that appear consistent with the proposition that overconfidence is at the root of entrepreneurial entry, it may still be worthwhile to rule out explicitly more rational economic explanations. Two such explanations come to mind: first, entrepreneurs might be aware of the positively-skewed distribution of risk ...

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