Hubris Theory of Entrepreneurship
Mathew Hayward and colleagues (2006) introduce a Hubris Theory to entrepreneurship. Their aim is to explain why so many new ventures are started despite a very high background failure rate.
After all, most businesses fail within the first few years of founding. So why do entrepreneurs keep trying to create new ones? The theory suggests that individuals overestimate the personal wealth they may attain by starting new ventures.
The Mechanism: Overconfidence
The theory assumes that individuals have information about their likelihood of success, but think that they can "beat the odds."
The theory hangs on the idea of confidence. More confident individuals have the bravado to be able to start businesses and allocate resources in challenging situations, while less confident individuals may not be moved to start ventures or grow them.
The Double-Edged Sword
While confidence drives entry, it can be detrimental to operations.
- The Risk: Hayward and colleagues (2006) suggest that overconfident individuals may harm their ventures by depriving them of resources. Thus, while overconfidence may help in starting a venture, it does not help much with operating a business.
- Empirical Evidence: Cassar (2010) finds that prospective entrepreneurs are indeed overconfident, while Hogarth and Karelaia (2012) find that overconfident entrepreneurs have lower success chances.
The Upside of Hubris
However, hubris is not entirely negative. According to Sundermeier (2017), hubristic founders exhibit certain traits that help them excel in their startups, including:
- Increased resilience in the implementation of original ideas.
- A high internal locus of control.
- The ability to be persuasive and secure strategic partnerships.
- A drive fueled by feelings of invulnerability.
Video Overview: Hubris in Management
Related Theories
Hubris Theory suggests that overconfidence is the "engine" of market entry but often the "poison" of operational survival. These frameworks explore the fine line between bravado and bias:
1. Personality & Cognitive Biases
- Narcissism Theory: While hubris is about ability, narcissism is about validation; both lead to aggressive strategies.
- Locus of Control: Hubristic founders believe they can personally dictate market outcomes regardless of external data.
- Impulsivity Theory: Overconfidence provides the cognitive "green light" for taking high-risk leaps.
2. Decision-Making & Risk
- Prospect Theory: Hubris often leads to "doubling down" on failing ventures due to a belief in inevitable success.
- Knightian Uncertainty: Hubris acts as a psychological shield, allowing founders to bear the "unbearable" unknown.
- Attribution Theory: The tendency to credit self for wins and blame external "luck" for losses.