Are Individuals Entering Self-employment overly Optimistic? An Empirical Test of Plans and Projections on Nascent Entrepreneur Expectations

This research examines the rationality of the expectations of nascent entrepreneurs. Consistent with conjectures regarding entry into self-employment, the author finds substantial overoptimism in nascent entrepreneurs' expectations, in that they overestimate the probability that their nascent activity will result in an operating venture. Further, for those ventures that achieve operation, individuals overestimate the expected future sales and employment. To explain variations in overoptimism, the author posits that those individuals who adopt an inside view to forecasting through the use of plans and financial projections, will exhibit greater ex ante bias in their expectations. Consistent with the inside view causing overoptimism in expectations, the author finds that the preparation of projected financial statements results in more overly optimistic venture sale forecasts.