The Fable of Entry: Bounded Rationality, Market Discipline, and Legal Policy

INTRODUCTION........................................................................................ 484 I. THE PUZZLES OF ENTRY............................................................. 488 A. The Assumption of Entrant Rationality: Empirical Findings vs. Economic Theory ............................................ 488 1. The First Puzzle: The Prevalence of Negative Net Present Value Entry ....................................................... 490 2. The Second Puzzle: Entrants’ Insensitivity to Predictors of Future Profitability................................... 492 3. The Third Puzzle: An Inferior Average Performance of Startup Entrants ................................... 494 B. Can the Rationality Assumption be Salvaged? ................... 497 1. Maintaining the Rationality Assumption: Windows of Opportunity, Limited Information, and the Fruits of Learning ...................................................................... 497 2. Modifying the Rationality Assumption: Maximizing Expected Utility with Negative Net Present Values ................................................................. 501 II. A BEHAVIORAL ANALYSIS OF ENTRY DECISIONMAKING ..... 503 A. Solving the First Puzzle: The Processes of Entrants’ Overconfidence...................................................................... 504 1. Optimistic Bias ................................................................ 505 2. The Desirability Bias and Related Phenomena ............ 508 3. The Illusion of Control ................................................... 512 B. Solving the Second Puzzle: The Side Effects of Entrants’ Overoptimism ....................................................... 514