Overconfidence and disappointment in venture capital decision making: An empirical examination

We examine the effects of overconfidence in venture capital investing. Overconfidence in financial decision making is a robust, well‐established finding, and its consequences for decisions by equity market investors, startup entrepreneurs, and CEO's of large firms have been comprehensively examined and documented. This paper considers the behavioral consequences of overconfidence by venture capitalists, comparing their anticipated returns to actual average returns. Our primary metric is Bell's disappointment, a measure of the difference between anticipated and actual payoff. We construct both deterministic and stochastic models, based on empirical data. We find that the average venture capitalist will experience substantial disappointment.