The Impact of Overconfidence and Ambiguity Seeking on Market Entry

Why do some people become entrepreneurs when it is not optimal? We explore this question by disentangling two mechanisms that may have been confounded: overconfidence and attitude toward uncertainty. In a laboratory experiment we shock individuals’ level of confidence in their skills to causally identify the effect of overconfidence on entry into competitive markets. Moreover, we highlight the critical role of ambiguity attitude on entry: independently of their level of confidence individuals exhibit ambiguity-loving behavior when the result of the competition depends on their skills, which in turn leads to a higher level of entry. This preference for ambiguity can explain results that have previously been attributed to overconfidence. Finally, we observe that excess entry does not always occur but depends on the intensity of competition and whether result of the competition depends on individuals’ skills.