The effects of overconfidence bias and herding bias on entrepreneurial performance

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The poor performance of entrepreneurial firms in Ghana has been attributed to economic and financial factors like scarcity of resources, poor institutions, and lack of capital for a long time, overlooking the physiological factors that have a direct impact on entrepreneurial performance. One important factor that is usually overlooked is the cognitive dissonance and heuristics entrepreneurs face when making decisions that affect the performance and success of their businesses. Behavioral finance has asserted that individuals, when making decisions, are not always rational and they are usually influenced by some cognitive bias. Research has proven that entrepreneurs are more susceptible to cognitive biases. This study focused on how the performance of entrepreneurial firms is affected by overconfidence and herding bias. This research relied on primary quantitative data obtained from questionnaires administered on entrepreneurs i n Ghana to examine how overconfidence bias and herding bias affect the performance of entrepreneurial firms. The results of this research showed that there is a positive relationship between overconfidence bias and entrepreneurial performance; such that a unit increase overconfidence bias could lead to 1.23 units increase in the performance of an entrepreneurial firm. The results also showed that there is a negative relationship between herding bias and entrepreneurial performance; such that a unit increase in herding bias could lead to 3.197 units decrease in entrepreneurial performance. This study concluded that entrepreneurs in Ghana could increase their performance by: (1) making conscious efforts to prevent themselves from experiencing negative biases, (2) seeking professional assistance in decision making and (3) having some form of education to acquire more knowledge.
Undergraduate thesis submitted to the Department of Business Administration, Ashesi University, in partial fulfillment of Bachelor of Science degree in Business Administration, May 2021
SMEs, cognitive bias, entrepreneurial performance