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Risk-taking in entrepreneurs: the role of uncertainty, stake and framing

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Farago K., Kiss O.
Magyar Pszichologiai Szemle (Hungarian Psychological Review)
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2005
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vol. 60
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issue 1/2
203-223
EN
We examined entrepreneurial risk-taking in hypothetical bet situations presented in the form of a questionnaire. The level of uncertainty and the amount staked were varied in the situations provided. The subjects were required to make choices between two profit-making situations in one half of the questions and two loss-making situations in the other half. The expected values of the alternatives offered were equal. In order to identify the risk-taking strategies unique to entrepreneurs, a sample consisting of college students was also involved in the study. The results suggest that entrepreneurs focus on the amount staked; probability factors are less commonly taken into consideration. This tendency results in different behavior in profit-making and loss-making situations: the potential profit motivates entrepreneurs to choose higher stakes, whereas an expected loss will characteristically prompt the avoidance of higher stakes and thus higher risks. In profit-making situations, the strategies applied by college students are different from those found in entrepreneurs: students' decisions are more pronouncedly influenced by probability factors than by the amount staked. The results point to the conclusion that for entrepreneurs, the emotional value of profit and loss is considerably high, and as a result, their reactions show manifestations of the affect heuristic. The picture emerging form the study qualifies to some extent the so-called endowment effect, which is a tendency in individuals to invest further resources into loss-making projects. Prospects for major losses deterred the respondents from taking risks.
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