Despite the high risk involved, thousands of individuals often decide to start ventures. Past research has found entrepreneurs do not have a great willingness to knowingly take risks. These findings suggest that entrepreneurs may not perceive the riskiness of starting ventures. Moreover, their risk perceptions might be clouded by reliance on cognitive biases (or mental shortcuts) in their decisions.

Although entrepreneurs often become dissatisfied with their new venture’s poor economic performance and over half of all ventures fail within five years, thousands of individuals still decide to start ventures. Researchers have, therefore, called for studies explaining why individuals decide to start companies, even though it is very risky business. In efforts to answer this question, scholars tested whether the risk propensity of entrepreneurs was greater than that of managers. Risk propensity is the tendency to take actions that one has judged to be risky. Surprisingly, research found that this trait did not differentiate entrepreneurs from others.

In response, some scholars suggest that individuals take risky entrepreneurial actions (i.e., actions that have a high possibility of disappointing outcomes) because they perceive less risk than most. Some scholars have argued individuals’ decision process, particularly a greater susceptibility to cognitive biases, may lower their perception of risk. These biases often arise when making complex and uncertain decisions, and may be especially prevalent among entrepreneurs.

One particular bias that seems prevalent is overconfidence. In his 1965 paper in the Journal of Consulting Psychology, S Oskamp initially described this overconfidence bias. Overconfidence may occur because individuals do not sufficiently revise their initial estimates after receiving new data (known as the anchoring and adjusting heuristic). They, therefore, do not realise the extent to which their estimates may be incorrect. Individuals may also become overconfident because they base their decisions on the ease with which they can recall reasons for confidence (known as the availability heuristic).

However, an easily remembered rationale may not increase the accuracy of the person’s information. Because decision-makers exhibiting overconfidence treat their assumptions as facts, they may not see the uncertainty associated with conclusions stemming from those assumptions. They, therefore, may erroneously conclude that a certain action is not risky. Leaders exhibiting the overconfidence bias may steer their firms into unknown territories and invest in risky ventures.

There is some evidence that overconfidence plays an important role when one considers whether to start a venture. For example, research has found entrepreneurs display greater overconfidence than managers do. Another cognitive bias that is common among entrepreneurs is called illusion of control. There is evidence the illusion of control may play a role in the decision to start a venture. An individual’s belief in his or her ability to control a venture’s outcome affects his or her intentions to form a venture. This belief, however, is based upon perceptions and may be inaccurate. In conclusion, entrepreneurs excited about their new business ventures should watch out for overconfidence and illusion of control shaping their low perceptions of entrepreneurial risks.