Cognitive Biases and Entrepreneurial Under-Diversification

Cervellati, Enrico Maria ; Pattitoni, Pierpaolo ; Savioli, Marco (2016) Cognitive Biases and Entrepreneurial Under-Diversification. Bologna: Dipartimento di Scienze economiche DSE, p. 36. DOI 10.6092/unibo/amsacta/5411. In: Quaderni - Working Paper DSE (1076). ISSN 2282-6483.
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Abstract

Cognitive biases lead entrepreneurs to overinvest in their own companies, over exposing themselves to idiosyncratic risk. Our novel theoretical model explains entrepreneurial under-diversification by measuring the amount of potential bias in entrepreneurs’ portfolio allocations brought about by overconfidence and over optimism. Simulation analyses based on our model allow us calculating the implicit levels of overconfidence and over optimism from observable portfolio choices. Finally, using a unique dataset including cross-regional data on Italian entrepreneurs and a structural equation modeling approach, we test the effect of overconfidence and over optimism on entrepreneurs’ portfolio allocations. Consistent with our theoretical predictions, we find a positive relationship between overconfidence and entrepreneur investments in their own companies. On the other hand, the role of over optimism seems to be negligible.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Cervellati, Enrico MariaUniversità di Bologna0000-0002-0018-9005
Pattitoni, PierpaoloUniversità di Bologna0000-0002-5283-1784
Savioli, MarcoUniversità di Bologna0000-0002-4497-3213
Keywords
Cognitive Biases, Entrepreneurship, Portfolio Optimization, Simulation Analysis, Under-diversification, Structural Equation Models
Subjects
ISSN
2282-6483
DOI
Deposit date
12 Sep 2016 13:24
Last modified
08 May 2017 13:24
URI

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