Hubris and 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.
[Image of Dunning-Kruger effect graph]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
