12 Uncertainty & Role of Confidence

types of uncertainty

• state uncertainty: inability to predict how the environment changes

• effect uncertainty: inability to predict how changes in the environment affect you

• response uncertainty: lack of insight into response options given a changing environment and the inability to predict the consequences of a response choice, including competitors’ responses=

role of confidence

• subjective and biased perceptions have a crucial impact on new business creation

• strongest covariate: individuals belief to have sufficient skills, knowledge and abilities to start a business

• confidence helps in pre-launch phase to start action and realize business opportunities

• confidence can hinder in launch and post-launch phase because overcaonfidence leads to a lower likelihood to stay in the market

role of overconfidence

negative correlation of entrepreneurial confidence and approximate survival chances of business

differences in confidence

• founder CEOs tend to be more confident that professional CEOs

• entrepreneurs tend to overestimate their own odds of success and underestimate the amount of risk

• nascent entrepreneurs are more confident that individuals with business experience

confirmation bias

• when believing in success entrepreneurs only look for information confirming belief

• self-reassurement increases bias furher

inside view

forecasting through the use of plans and financial projection leads to greater ex ante bias

substantial overoptimism

nascent entrepreneurs’ overstimating the probability that their activity will result in an operating venture

• forecasting through plans and financial projections increases this

optimal level of confidence

~ 65%

• everything above is overshooting: decreases likelihood of succes

  • overshooting is more likely if you are more confident on average

optimal ratio of positive and negative feedback

80 (+) / 20 (-)

high variability in percieved self-efficacy…

is essential to enable the ideal calibration of confidence

Dunning-Kruger-effect

• cognitive bias: people with low skill or knowledge in a specific area tend to overstimate their competence

• meta-cognition: combination of lack of expertise to perform well and lack of ability to accurately evaluate personal performance

above-average-effect

cognitive bias: people overestimate their own qualities and abilities relative to others (believe they are better than the average person)

naive optimism

unwavering belief that good outcomes are likely, ignoring risks, evidence or complexities

necessary naivety

beneficial, often strategic form of innocence or idealism allowing individuals to undertake challenging tasks without being paralyzed by risks or failures

escalation of commitment

• behavioral phenomenon: continuous investment of resources into a failing course of action

• trapped by the entrepreneurial mindest

action regulation theory

1. motivational phase

   • choosing a goal, relatively impartial and objective analysis of information, effective processing of information, open-minded towards available information to all kinds of informations

2. volitional phase

   • pursuing the goal, overestimation of desireability, illusory, optimistic prediction about the futue, cognitive turning toward informations that relates to the implementation of the chosen goal, reduce receptivenss toward information

ways out of escalated commitment

• make a plan when to stop (invested time, money, resources)

• specify and set fixed exit points

types of uncertainty (Packard)

four types of uncertainty, characterised by open or closed options or outcomes

• set of options

  • open: try to gather resources that are necessary to implement the idea, typically more resources available than we think

  • closed: option are pre-specified, use set of available resources

• set of outcomes

  • open: idea possibilities are open, not predefined

  • closed: clear idea what to implement, no flexibility to change

environmental uncertainty (Packard)

set of options: closed

outcomes: open

creative uncertainty (Packard)

set of options: open

outcomes: closed

absolute uncertainty (Packard)

set of options: open

outcomes: open

risk/ambiguity (Packard)

set of options: closed

outcomes: closed