This paper applies a general equilibrium occupational choice model to study the impact
of optimism on the earnings of entrepreneurs and workers. We extend Lucas' (1978) by
assuming a fraction of individuals is optimistic about their ability as entrepreneurs. The
model shows that optimism leads to a misallocation of talent and inputs which raises input
prices and lowers output. The model is calibrated to match salient features of the U.K.
economy and the British Household Panel Survey. The calibration shows that optimism
can account for more than half of the size of the entrepreneurial earnings puzzle in the
U.K.