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.
Individuals overestimate the personal wealth they may attain by starting new ventures. The theory assumes that individuals have information about their likelihood of success, but think that they can beat the odds.
Hayward and colleagues 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.
Cassar (2010) finds empirical evidence that prospective entrepreneurs are indeed overconfident. Hogarth and Karelaia (2012) find that overconfident entrepreneurs have lower success chances. Thus, overall, there is some support for the theory and it does help explain the higher than expected entry rates we see in practice.
Hayward, M. L., Shepherd, D. A., and Griffin, D. (2006). A hubris theory of entrepreneurship. Management Science, 52(2), 160-172.
Cassar, G. (2010). Are individuals entering self‐employment overly optimistic? An empirical test of plans and projections on nascent entrepreneur expectations. Strategic Management Journal, 31(8), 822-840.
Hogarth, R. M., and Karelaia, N. (2012). Entrepreneurial success and failure: Confidence and fallible judgment. Organization Science, 23(6), 1733-1747.