Are newly self-employed overly optimistic about their future well-being?

Abstract

The formation of expectations is considered a fundamental aspect of the decision process when people reason about entering self-employment. We evaluate the accuracy of newly self-employed individuals’ predictions of their overall future well-being. Based on individual panel data for Germany, we find that they, on average, are overly optimistic when we compare their predictions right after the status change with their actual life satisfaction five years later. This finding is robust to controlling for any time invariant personality traits like individual optimism. And it also holds for those self-employed individuals who successfully remain in business for at least five years. A possible reason for the biased prediction might be that they underestimate the heavy workload reflected in higher working hours than desired, as well as the decline in leisure satisfaction after the status change.