Why do some people become entrepreneurs when it is not optimal? We explore this question by disentangling two mechanisms that may have been confounded: overconfidence and attitude toward uncertainty. Following Frank Knight (1921), we further distinguish between two types of uncertainty: risk and ambiguity. In a laboratory experiment, we shock individuals’ level of confidence in their skills to causally identify the effect of overconfidence on entry into competitive markets. Moreover, we highlight the critical role of attitude toward ambiguity on entry: independent of their level of confidence, individuals exhibit ambiguity-seeking behavior when the result of the competition depends on their skills, which in turn leads to a higher level of entry. This preference for ambiguity can explain results that have previously been attributed to overconfidence. Finally, we observe that excess entry does not always occur but, rather, depends on the intensity of competition and whether the result of the competition depends on individuals’ skills (co-authored with Thomas Åstebro).
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