The Engine of Capitalism
Kahneman connects optimism with entrepreneurship and overconfidence. This entry contains the chapter’s endnotes, rather than the main explanation of how optimism can encourage ventures while distorting judgments of success.
THE IDEA
24: THE ENGINE OF CAPITALISM
The excerpt below consists of chapter endnotes. The main argument and the details of the cited studies are not included.
[1] you already feel fortunate: Miriam A. Mosing et al., “Genetic and Environmental Influences on Optimism and Its Relationship to Mental and Self-Rated Health: A Study of Aging Twins,” Behavior Genetics 39 (2009): 597–604. David Snowdon, Aging with Grace: What the Nun Study Teaches Us About Leading Longer, Healthier, and More Meaningful Lives (New York: Bantam Books, 2001).
[2] bright side of everything: Elaine Fox, Anna Ridgewell, and Chris Ashwin, “Looking on the Bright Side: Biased Attention and the Human Serotonin Transporter Gene,” Proceedings of the Royal Society B 276 (2009): 1747–51.
[3] “triumph of hope over experience”: Manju Puri and David T. Robinson, “Optimism and Economic Choice,” Journal of Financial Economics 86 (2007): 71–99.
[4] more sanguine than midlevel managers: Lowell W. Busenitz and Jay B. Barney, “Differences Between Entrepreneurs and Managers in Large Organizations: Biases and Heuristics in Strategic Decision-Making,” Journal of Business Venturing 12 (1997): 9–30.
[5] admiration of others: Entrepreneurs who have failed are sustained in their confidence by the probably mistaken belief that they have learned a great deal from the experience. Gavin Cassar and Justin Craig, “An Investigation of Hindsight Bias in Nascent Venture Activity,” Journal of Business Venturing 24 (2009): 149–64.
[6] influence on the lives of others: Keith M. Hmieleski and Robert A. Baron, “Entrepreneurs’ Optimism and New Venture Performance: A Social Cognitive Perspective,” Academy of Management Journal 52 (2009): 473–88. Matthew L. A. Hayward, Dean A. Shepherd, and Dale Griffin, “A Hubris Theory of Entrepreneurship,” Management Science 52 (2006): 160–72.
[7] chance of failing was zero: Arnold C. Cooper, Carolyn Y. Woo, and William C. Dunkelberg, “Entrepreneurs’ Perceived Chances for Success,” Journal of Business Venturing 3 (1988): 97–108.
[8] given the lowest grade: Thomas Åstebro and Samir Elhedhli, “The Effectiveness of Simple Decision Heuristics: Forecasting Commercial Success for Early-Stage Ventures,” Management Science 52 (2006): 395–409.
[9] widespread, stubborn, and costly: Thomas Åstebro, “The Return to Independent Invention: Evidence of Unrealistic Optimism, Risk Seeking or Skewness Loving?” Economic Journal 113 (2003): 226–39.
[10] bet small amounts of money: Eleanor F. Williams and Thomas Gilovich, “Do People Really Believe They Are Above Average?” Journal of Experimental Social Psychology 44 (2008): 1121–28.
[11] “hubris hypothesis”: Richard Roll, “The Hubris Hypothesis of Corporate Takeovers,” Journal of Business 59 (1986): 197–216, part 1.
[12] “value-destroying mergers”: Ulrike Malmendier and Geoffrey Tate, “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction,” Journal of Financial Economics 89 (2008): 20–43.
[13] “engage in earnings management”: Ulrike Malmendier and Geoffrey Tate, “Superstar CEOs,” Quarterly Journal of Economics 24 (2009), 1593–1638.
[14] self-aggrandizement to a cognitive bias: Paul D. Windschitl, Jason P. Rose, Michael T. Stalk-fleet, and Andrew R. Smith, “Are People Excessive or Judicious in Their Egocentrism? A Modeling Approach to Understanding Bias and Accuracy in People’s Optimism,” Journal of Personality and Social Psychology 95 (2008): 252–73.
[15] average outcome is a loss: Uri Simonsohn, “eBay’s Crowded Evenings: Competition Neglect in Market Entry Decisions,” Management Science 56 (2010): 1060–73.
[16] “diagnosis antemortem”: Eta S. Berner and Mark L. Graber, “Overconfidence as a Cause of Diagnostic Error in Medicine,” American Journal of Medicine 121 (2008): S2–S23.
[17] “disclosing uncertainty to patients”: Pat Croskerry and Geoff Norman, “Overconfidence in Clinical Decision Making,” American Journal of Medicine 121 (2008): S24–S29.
[18] background of risk taking: Kahneman and Lovallo, “Timid Choices and Bold Forecasts.”
[19] Royal Dutch Shell: J. Edward Russo and Paul J. H. Schoemaker, “Managing Overconfidence,” Sloan Management Review 33 (1992): 7–17.
When to use it
Starting a new business: Realize that most ventures fail, so plan for contingencies.
Investing in startups: Be aware of overconfidence in founders' projections.
Medical diagnosis: Avoid overconfidence in test results; consider alternative diagnoses.
Corporate mergers: Beware of hubris in acquisition decisions.
FROM THEORY TO EVERYDAY LIFE
In practice
Entrepreneurs' Overconfidence
The example attributes to Cooper et al. (1988) a finding that one-third of entrepreneurs assigned no chance to failure. Its comparison with a 70-90% failure rate is not documented in the supplied endnotes, which do not define that rate’s population or time period.
Competition Neglect on eBay
The endnotes cite Simonsohn’s work on competition neglect in eBay auctions. Assessing when auctions receive higher prices requires the study’s results and conditions; those details are not included here.
A MOMENT TO REFLECT
Put it to work.
When have you overestimated the success of a project or venture? What were the consequences?
How can you incorporate competitive analysis to counteract optimism bias?
In what ways do successful entrepreneurs manage optimism without falling into overconfidence?
References
- Genetic and Environmental Influences on Optimism and Its Relationship to Mental and Self-Rated Health — Mosing et al. (2009)
- Looking on the Bright Side: Biased Attention and the Human Serotonin Transporter Gene — Fox et al. (2009)
- Optimism and Economic Choice — Puri and Robinson (2007)
- Differences Between Entrepreneurs and Managers in Large Organizations — Busenitz and Barney (1997)
- Entrepreneurs’ Perceived Chances for Success — Cooper et al. (1988)
- Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction — Malmendier and Tate (2008)
CONTINUE THE CONVERSATION
Source texts
- Thinking, Fast and Slow (Daniel Kahneman)