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Market Entry Decisions: Effects of Absolute and Relative Confidence

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posted on 2009-04-20, 14:41 authored by Fergus Bolger, Briony D. Pulford, Andrew M. Colman
In a market entry game, the number of entrants usually approaches game-theoretic equilibrium quickly, but in real-world markets business start-ups typically exceed market capacity, resulting in chronically high failure rates and suboptimal industry profits. Excessive entry has been attributed to overconfidence arising when expected payoffs depend partly on skill. In an experimental test of this hypothesis, 96 participants played 24 rounds of a market entry game, with expected payoffs dependent partly on skill on half the rounds, after their confidence was manipulated and measured. The results provide direct support for the hypothesis that high levels of confidence are largely responsible for excessive entry, and they suggest that absolute confidence, independent of interpersonal comparison, rather than confidence about one's abilities relative to others, drives excessive entry decisions when skill is involved.

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Citation

Experimental Psychology, 2008, 55 (2), pp. 113-120

Published in

Experimental Psychology

Publisher

Hogrefe and Huber

issn

1618-3169

Copyright date

2008

Available date

2009-04-20

Publisher version

http://econtent.hogrefe.com/doi/abs/10.1027/1618-3169.55.2.113

Language

en

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