Promising entrepreneurs differ in terms of the amount of (relevant) knowledge they possess. In addition, different environments in which firms started require different types and levels of knowledge.
It may be expected that individuals who are well-informed about the possible consequences of their choices are unlikely to display over optimism.
A distinction is usually made between general and specific (or relevant) knowledge (Becker, 1993; Castanias and Helfat, 2001).
Education enhances learning and increases the problem-solving ability of an individual within a given environment.
Individuals with higher levels of education tend to be more self-confident (Davidsson and Honig, 2003; Bhandari and Deaves, 2006) and, accordingly, may have also higher expectations of the results of their work efforts.
Bhandari and Deaves (2006, p. 10) argue that there is an important difference between formal education and relevant (or pertinent) knowledge: “those with formal education do not know more about investments, but they think they do: thus they are overconfident”.
Relevant knowledge may be acquired through previous experience with, e.g., management, the industry and starting up a business.
Yet, in a study by Wright et al. (1997) venture capitalists reported that serial entrepreneurs were less able to recognize their own limitations than first-time entrepreneurs.
Also, Hayward et al. (2006) claim that entrepreneurs who are experienced founders may be overconfident when the nature of their venture differs from that of previous endeavours. Hence, only specific knowledge is expected to lead to more realism among nascent entrepreneurs.
Cooper et al. (1988) find that serving similar markets appears to lower over optimism and enhance venture success. They also find that if founders previously worked for an organization using similar technology, they were more likely to be successful. Hence, related experience is expected to lead to more realism for activities in uncertain environments.