Overconfident entrepreneurs: Innovating more and paying the piper

The net benefit of overconfidence as a personality trait in entrepreneurs has long remained undetermined. In particular, do the salutary effects of possessing an optimistic outlook overcome the drawbacks of an increased likelihood of acting rashly? In these preliminary results, we find that, on balance, overconfident entrepreneurs do add positive economic value through their increased financial investment in innovation, as well as through the outputs of these trailblazing activities. On the other side of the ledger, we also find that overconfident entrepreneurs are more likely to seek financing from informal sectors, which typically charge a much higher cost of capital compared with more traditional sources. Our results suggest that nationwide policies that help encourage innovation from these entrepreneurs, including those that mitigate the sometimes exorbitant costs of capital, may lead to increased economic growth. Our results also highlight the need for additional in-depth analyses in this important area of research.