research@hec - Issue #30 - (Page 6)

strategy research hec Entrepreneurship: When overconfidence favors riskier bets Studies have often pointed to entrepreneurs’ excessive confidence in their own talents as an important factor in perseverance and commitment to entrepreneurship. PhD student Anisa Shyti uncovers the interactions between overconfidence and attitudes to ambiguous prospects in entrepreneurial decision-making. Anisa Shyti B iography Anisa Shyti is doing her PhD at HEC’s Strategy and Business Policy Department under the supervision of Thomas Astebro (Strategy and Business Policy Department) and Mohammed Abdellaoui (Decision Science Department and CNRS Research Director). Originally from Albania, Anisa Shyti received her MSc in Business Administration from Milan’s Bocconi University in 2005 and stayed on at Bocconi as a lecturer and research assistant, and to work on university projects with the fashion industry. Hopping into the unknown is an integral part of entrepreneurship. Maybe the quaint bed&breakfast opened with loving labour will flourish while the vinyl record shop next door, founded with equal passion, flounders. Or perhaps things will turn out the other way around. This uncertainty also pervades many aspects of every day life, as HEC doctoral student Anisa Shyti points out. “The topic inspires me,” she says. “After all, when I left Albania to study in Milan, I was heading for the unknown, since I had never left my country before.” Even hospitals can sometimes only give the probable chance of success of a medical treatment. This lack of clarity regarding likelihoods of outcomes is described in decision science as ambiguity (rather than uncertainty, which suggests knowing nothing at all, probability-wise). It is also distinct from risk, where probabilities are known – as in the game of Russian roulette (playing with a known number of bullets). “It’s a very puzzling concept,” admits Anisa Shyti, “but also a promising area for management studies.” Indeed, ambiguity is very common in entrepreneurship, where it’s hard to know the odds of success of a venture, but the decision-making processes of entrepreneurs in a context of ambiguity have not been studied much. So the budding researcher decided to delve into the subject for her dissertation. AMBIGUITY AVERSION: GOING FOR “SAFE” BETS The angle of ambiguity is all the more interesting in a context of entrepreneurship – usually viewed as an act of audacity – as human beings tend be cautious in their gambles: as a rule, they tend to prefer options with stated probabilities (50/50 for example) over those with unknown probabilities. This phenomenon of ambiguity aversion was originally described in 1961 as “Ellsberg’s paradox.” In terms of entrepreneurship, it could translate into choosing to open a franchise such as McDonald’s – a venture almost guaranteed to succeed – as opposed to a totally new fast-food concept, therefore with more “ambiguous” chances of success, as Anisa Shyti explains. Yet experimental research (as well as real-life examples of outlets other than the famous hamburger chain) show that decision-makers are not consistently ambiguity averse. On the contrary, ambiguity attitudes of decision-makers are rich, depend on context as well as on the perceived likelihood of an event. This opens up new perspectives in the study of decision-making, in particular the role of prior beliefs (antecedents of action). OVERCONFIDENT ENTREPRENEURS Anisa Shyti decided to examine the impact of overconfidence, which is one of the most important 6 • December 2012 - January 2013

Table of Contents for the Digital Edition of research@hec - Issue #30

Cover & Contents
Financial analysts: Are they useful after all?
The luxury market: A development opportunity for the nomads of the Tibetan Plateau?
Entrepreneurship: When overconfidence favors riskier bets

research@hec - Issue #30