Explaining Excess Entry in Winner-Take-All Markets

We report experimental data from standard market entry games and winner-take-all games. At odds with traditional decision-making models with risk aversion, the winner-take-all condition results in substantially more entry than the expected-payoff-equivalent market entry game. We explore three candidate explanations for excess entry: blind spot, illusion of control, and joy of winning, none of which receive empirical support. We provide a novel theoretical explanation for excess entry based on cumulative prospect theory and test it empirically. Our results suggest that excess entry into highly competitive environments is not caused by a genuine preference for competing, but is instead driven by probability weighting. Market entrants overweight the small probabilities associated with the high payoff outcomes in winner-take-all-markets, while they underweight probable failures.