And a vision appeared unto them of a great profit: evidence of

self-deception among the self-employed

(Arabsheibani, Meza, Maloney, Pearson)
Austin Lu
November 11, 2014
The authors find evidence to support the idea that the chance of gain is over-valued while the
chance of loss is undervalued, and support De Meza and Southeys suggestion that entrepreneurs
are disproportionately overoptimistic because optimists expected returns remain positive until
the actual expected returns become negative and realists are driven out. The authors provide
evidence using the British Household Panel Study from 1990-1996, where individuals recorded a
better off, worse off, or same financial outcome for both the current year compared to the
previous year, and for a prediction of the following year compared to the current year. For the
self-employed, the ratio between those who forecast an improvement but experienced
deterioration is 4.6 times higher than those who forecast deterioration but experience an
improvement; the ratio for employees is 2.9. The results suggest over-optimism is present in
general and is particularly pronounced for the self-employed. This conclusion is supported
because both for self-employed and employees, the accuracy of forecasts is greater when
predicting deterioration rather than improvement, and this difference is larger for the selfemployed. The authors propose and provide evidence that the self-employed unambiguously
forecast better outcomes but experience worse outcomes than the employed, and that even
employees are over-optimistic. They show this by generating the distribution of forecasts of the
self-employed by transferring probability weight from lower to higher forecasts of the employee
distribution. The authors also find that forecasting better off makes it more likely the
individual is self-employed. This over-optimism is lower for those with higher education, peaks
at age 36, and is less for women and singles; the authors propose the gender difference is
consistent with evolutionary psychology because self-delusion may be advantageous for a man in
attracting a woman, by convincing her of his future success.