Cognitive Biases, Risk Perception, and Individual's Decision to Start a New Venture

Abstract

The purpose of this article is to investigate the relationship of overconfidence and illusion of control towards the start of new venture, taking in consideration the mediating role of risk perception in the context of Tunisia. This article examines students' responses to surveys based on a teaching case titled “Optical Distortion, Inc.” The authors tested hypotheses by correlation and regression analysis. The results show that the perception towards risk associated with new venture plays an important role in decision-making. Moreover, they find that overconfidence and illusion of control reduce risk perception associated to the decision to start a venture. While overconfidence directly affects the decision to start a venture and indirectly through its effect on reducing the risk perception, illusion of control has neither a direct nor an indirect impact on that. These results partially confirm those of Simon show that the mediation exists but partially.

Tunnel Construction Workers’ Cognitive Biases and Unsafe Behaviors: The Mediating Effects of Risk Perceptions

“…Workers' CBs also can be antecedents of workers' RPs. is finding is consistent with prior studies on team decision-making [28] and venture-starting [53,65]. In detail, we validated that AB and FB more likely influence ERP, and overconfidence more likely influences BRP.…”

“…In water security research, Kosovac and Davidson [52] validated that CBs are associated with lower risk scores. Zaiane and Moussa [53] argued that overconfidence and illusion of control reduced RPs when managers start a venture. According to the perceptive objects, we divided RP into two types, namely, environmental risk perception (ERP) and behavioral risk perception (BRP).…”

Overconfidence and financial decision-making: a meta-analysis

“…As Yeoh and Wood (2011) or Merkle (2017) state, indirect overconfidence proxies may show stronger associations with various financial decisions because they often involve other causal factors, like risk propensity, which are positively associated with one's actual overconfidence and as a result they confoundingly strengthen the relationship between the proxy used and financial decision-making. A relatively recent research supports these interpretations, showing that an individual's risk perception is indeed an important factor mediating the relationship between overconfidence and financial decision-making (Kraft et al , 2017; Zaiane and Moussa, 2018).…”

Risk Perception as a Mediator in Explaining the Relationship of Cognitive Biases and New Venture Creation

“…Then, their tendency and capacity to predict impending changes or assess threats and opportunities gets diminished. Thus, they end up taking huge risks not because they intentionally accept high levels of risk but because their own biases have retarded and reduced their perception of high risks (Simon et al, 2000; Zaiane & Ben, 2018). Therefore, basing ourselves on theoretical justification and on our own data, the following hypothesis is proposed: Hypothesis 2 (H 2 ): Overconfidence reduces the high-risk perception associated with a creation of new venture. …”