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Study: Overconfident people more likely to make bad crowdfunding investments

(ridofranz / Depositphotos.com)

(ridofranz / Depositphotos.com)

Do you believe in yourself? If so, you may want to think twice before investing in crowdfunded ventures.

New research from Indiana University’s Kelley School of Business shows that people who overestimate their talent at investing are three times more likely to make bad decisions when investing in equity crowdfunded opportunities.

“Our research shows that crowdfunders with inflated self-belief quickly stop processing information properly, put in less decision-making effort, erroneously follow the crowd and make hasty investment decisions in poor-quality investment opportunities,” said Regan Stevenson, assistant professor of management and entrepreneurship at the school.

Stevenson and his colleagues — Michael Ciuchta of the University of Massachusetts, Chaim Letwin and Jenni Dinger of Suffolk University and Jeffrey Vancouver of Ohio University — conducted three studies involving more than 500 people.

First, researchers separated participants into two groups who viewed equity crowdfunding pitches, then made investment decisions. Investors who said they had a higher belief in themselves were less likely to identify and invest in high-quality venture opportunities, the researchers found.

In another study, participants could hear comments from others that ventures were good or bad, but didn’t actually match the quality of the investment. Confident investors were more likely to follow crowd sentiment into a bad investment opportunity. A third study had yielded results similar to the first two experiments.

The paper, “Out of Control or Right on the Money? Funder Self-Efficacy and Crowd Bias in Equity Crowdfunding,” is set to be published in the March issue of the Journal of Business Venturing.

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