The Return to Independent Invention: Evidence of Unrealistic Optimism, Risk Seeking or Skewness Loving?

Examining a sample of 1,091 inventions I investigate the magnitude and distribution of the pre‐tax internal rate of return (IRR) to inventive activity. The average IRR on a portfolio investment in these inventions is 11.4%. This is higher than the risk‐free rate but lower than the long‐run return on high‐risk securities and the long‐run return on early‐stage venture capital funds. The portfolio IRR is significantly higher, for some ex ante identifiable classes of inventions. The distribution of return is skew: only between 7‐9% reach the market. Of the 75 inventions that did, six realised returns above 1400%, 60% obtained negative returns and the median was negative.