How do judgmental overconfidence and overoptimism shape innovative activity?

•We argue that the connection between overconfidence and innovation is more complex than the previous literature suggests.•We show theoretically and experimentally that different forms of overconfidence may have opposing effects on innovative activity.•Overoptimism leads to an innovation enhancing effect, but judgmental overconfidence inhibits innovation.•We test the external validity of our laboratory measure using external measures of innovative activity.

Recent field evidence suggests a positive link between overconfidence and innovative activities. In this paper we argue that the connection between overconfidence and innovation is more complex than the previous literature suggests. In particular, we show theoretically and experimentally that different forms of overconfidence may have opposing effects on innovative activity. While overoptimism is positively associated with innovation, judgmental overconfidence is negatively linked to innovation. Our results indicate that future research is well advised to take into account that the relationship between innovation and overconfidence may crucially depend on what type of overconfidence is most prevalent in a particular context.