The Problems and Promise of Entrepreneurial Partnerships: Decision Making, Overconfidence, and Learning in Founding Teams

Chen, J. S., Elfenbein, D. W., Posen, H. E., & Wang, M. Z. 2022. The Problems and Promise of Entrepreneurial Partnerships: Decision-Making, Overconfidence, and Learning in Founding Teams. Academy of Management Review, 47(3): 489–520.

55 Pages Posted: 2 Jun 2020 Last revised: 10 May 2023

See all articles by John S. Chen

John S. Chen

University of Florida

Daniel W. Elfenbein

Washington University in St. Louis - John M. Olin Business School

Hart E. Posen

Tuck School of Business - Dartmouth College

Ming zhu Wang

Washington University in St. Louis - John M. Olin Business School

Date Written: May 1, 2020

Abstract

How should decision-making be organized in entrepreneurial teams when founders exhibit confidence biases? New ventures are commonly founded by teams of entrepreneurs, who must employ a decision-making structure that implicitly or explicitly defines how individual beliefs are aggregated into team decisions. We consider this issue through the lens of organizational economics that focuses on decision-making governance. Using a computational model, we consider three archetypal decision-making structures: partnership voting, a boss with employees, and a buyout option (partnership convertible to boss structure). We highlight the conditions under which partnership voting is an effective means of governing market entry and exit decisions when teams’ decision-making is informed by efforts to learn about the merits of uncertain opportunities. The promise of partnership voting is realized when entrepreneurs are either unbiased or optimistic about their likelihood of success. Partnership voting is problematic when entrepreneurs differ in their biases or respond too rapidly to new information, in which case a buyout option is better. From a policy perspective, we show that confidence biases may be managed by selectively matching the decision-making structure to entrepreneurs' biases, and that doing so may substantially improve the performance of new ventures.

Keywords: learning, opportunity assessment, bias, overconfidence, entrepreneurship, organizational decision-making

JEL Classification: C63, D70, M13

Suggested Citation

Chen, John S. and Elfenbein, Daniel W. and Posen, Hart E. and Wang, Ming zhu, The Problems and Promise of Entrepreneurial Partnerships: Decision Making, Overconfidence, and Learning in Founding Teams (May 1, 2020). Chen, J. S., Elfenbein, D. W., Posen, H. E., & Wang, M. Z. 2022. The Problems and Promise of Entrepreneurial Partnerships: Decision-Making, Overconfidence, and Learning in Founding Teams. Academy of Management Review, 47(3): 489–520., Available at SSRN: https://ssrn.com/abstract=3595484

John S. Chen

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Daniel W. Elfenbein (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.elfenbein.net

Hart E. Posen

Tuck School of Business - Dartmouth College ( email )

Hanover, NH 03755
United States

Ming zhu Wang

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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