entrepreneurship-and-innovation-school-center.pptx

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1. Entrepreneurial Risk Attitudes Overview Bounded rationality causes risks in human activity. This module examines entrepreneurial attitudes toward business risk. It examines specifically the research findings regarding the determination of different types of risk attitudes and the impact of risk attitudes on growth and success of firms. It also discusses the relationship between risk behaviors and self-efficacy and optimism.

2. Entrepreneurial Risk Behavior Risk plays a big role in the business world, especially looking for very profitable business opportunities. In half of entrepreneurs exit with no equity ( Astebro et al, 2014). The risk many people go into business, every year due to tolerance. To link risk to entrepreneurship, Knight (1921) that successful entrepreneurs possess the ability to measure the probability of the future outcome of risk as opposed to uncertain where future outcomes are difficult to determine. For example, D iversification measured by the variance of performance of each alternative reduces real risk. Khilstrom and Laffont (1979) develop a model linking aversion to individuals who become employees and low risk aversion to those who become entrepreneurs.

3. Feng and Rauch (2015) provided simpler forms and extensions of the model. Astebro et al. (2014) developed the standard expected utility model of risk preference as a function of utility over wealth. The model could predict that most people have utility functions with risk aversion who prefer to work with low pay than those who prefer the possibility of huge gains but risky entrepreneurial ventures. Thus, holding other factors constant such as entrepreneurial ability and financing limitations, the individual's preferences over risk can play a critical role in determining entrepreneurial entry decisions. The literature describes risk attitudes, risk preferences, risk tolerance, risk aversion, and risk propensity. All usages of the concept attempt to answer whether something in an individual's personality predisposes them to take on the risky conditions of entrepreneurship and the impact personality trait on outcomes,

4. Methods of Measuring Risk Attitudes One way to measure risk attitude is through self-assessment. In most cases, the questions asked to vary depending on th e level of specificity. Self-reported risk-aversion measures are problematic as they lack specific attitudes towards risk, which can lead to response bias. Entrepreneurs may be overconfident, potentially skewing self-reported results. General attitudes may not specify attitudes toward start-up processes, as they may not be related to financial career risk. Some researchers use company-specific assumptions to measure risk attitudes, while others use self-confidence or self-knowledge to examine entrepreneurs' investment portfolios and activity. Situational questions can also be more reliable than general risk attitude questions from self-report surveys.

5. Expected Utility Model and Risk Aversion The Expected Utility Model is a risk model in economics used to evaluate decisions involving uncertainty. It suggests that individuals choose actions causing the highest expected utility, which is the sum of the potential outcomes. The expected utility hypothesis, a standard economic model, has been found to violate some psychological experiments. It suggests that individuals prefer risk-averse investments with higher returns, while risk-seekers prefer riskier ones. This is evident in the decision-making process of entrepreneurs, innovators, inventors, speculators, and lottery ticket buyers. However, most managers and investors are risk averters, involving substantial monetary amounts. The utility function of risk-averse, risk-neutral, and risk-seeker individuals varies depending on their level of risk.

6. A risk-averse individual with a wealth of 5000 with a probability of losing 3,000 is offered insurance against risk. The expected utility of no insurance is 5,000-premium, while the expected utility with insurance is 5,000-premium. The premium for insurance is 1,669.55, and the decision to insure decreases if the premium is larger than 1,669.55. For risk-seeking individuals, the expected utility function is p, and the probability of not gambling is p.

7. Studies compare risk attitudes of entrepreneurs to managers, general population, and different groups with different skill levels and motivations. Lazear (2005) found a positive correlation between industry-level earnings and entrepreneurial entry. Hall and Woodward (2010) found entrepreneurs have a high-risk tolerance. Evidence shows risk attitudes of entrepreneurs versus business managers are inconclusive. Stewart and Roth (2001) found that entrepreneurs have a greater risk propensity than managers, contradicting Miner and Raju (2004) who found entrepreneurs are more risk avoidant.

8. Other studies have examined risk preferences in entrepreneurs by examining their investment netrics and behaviors. These studies have used various methods to measure risk preference, such as stock, hedge scoping, personal leverage, and earnings-related risk. They also compared risk attitudes of entrepreneurs to the general population using PSED data. The researchers found that risk-tolerant entrepreneurs are significantly more risk-averse than the general population, valuing autonomy and dignity more than monetary benefits. Other researchers have also found significant differences in entrepreneurs' primary goals, such as venture growth versus family income. They also found that opportunity entrepreneurs are more willing to take risks than necessity entrepreneurs. Entrepreneurs with creativity-driven motivation are more risk-tolerant than others. However, there is no uniform consensus on risk preferences and differences between populations. More research is needed to understand risk aversion among entrepreneurs and explore differences between actual risk and perceived risk. It's unclear whether risk attitudes can be separated from over-optimism and overconfidence.

9. Effect of Risk Attitudes in the Start-up Process The impact of entrepreneurial risk attitudes on venture success has been studied extensively. Cramer et al. (2002) found that risk aversion reduces entrepreneurial entry, but the link is not conclusive. Gürol and Atsan (2006) found higher risk-taking propensity among university students. Ahn (2010) found that relative risk tolerance positively affects self-employment probability. Brown et al (2011) found that willingness to take financial risk correlates positively with future self-employment. Ekelund et al. (2005) found harm avoidance negatively affects self-employment probability. Research indicates that individuals with higher risk tolerance are more likely to enter entrepreneurship, but it's crucial to consider situational factors. Designing unemployment insurance benefits or universal basic income schemes can help policymakers understand risk tolerance levels. Risk-tolerant individuals may exit unemployment by starting their own businesses, despite government incentives.

10. Risk Tolerance and Growth and Success Entrepreneur Risk tolerance is generally believed to favor business creation, but its impact on long-term firm success remains unclear. A meta-analysis of 60 studies found that risk propensity is positively associated with early entrepreneurial intentions but not with entrepreneurial performance. Hvide and Panos (2014) hypothesized that risk-tolerant businesses might underperform over time due to a higher number of mediocre ideas. Investment data shows common-stock investors are 50% more likely to start a firm but have lower sales and return on assets.

11. Korunka et al. (2003) found that successful entrepreneurs display a medium risk-taking propensity, suggesting that some risk-taking propensity may be helpful for business success. Hyytinen et al. (2015) found that risk-loving entrepreneurs operating innovative firms are less likely to survive over a three-year follow-up period compared to risk-loving entrepreneurs running less innovative operations. Cucculelli and Ermini (2013) found that firms run by risk-loving entrepreneurs tend to perform better, with the introduction of new products positively affecting firm growth only in firms owned by risk-loving individuals. Risk-loving entrepreneurs may also stimulate firm growth through innovation.

12. Probability of Exiting Entrepreneurship Caliendo et al. (2010) measured in GSOEP datasets atitudes have a non-relationship with entrepreneurial that risk as the exit rates of medium risk takers are 40% lower than those, for low and high risk takers. While a positive relationship emerges from the literature regarding risk taking and initial entry into self- employment, there appears to be a more complex relationship between risk taking and growth/exit choices. These early results need further verification using data from other countries and different entrepreneurial populations.

13. Entrepreneurial Self-efficacy, Risk Attitudes, and Optimism Research shows that an individual's ESE significantly influences their risk propensity, perceived learning from entrepreneurship-related courses, and previous entrepreneurial experience. High ESE allows entrepreneurs to be comfortable taking risks, while low-risk preference students have higher relationship efficacy and tolerance efficacy. Higher risk preferences may select entrepreneurial qualities, while lower risk preferences may select managerial qualities. Entrepreneurs may enter the risky world of business venturing because they over-assess their likelihood of positive returns. Moore and Healy's framework of overconfidence consists of overestimation and over-placement, which can encourage entrepreneurship and riskier decisions. Astebro et al. (2014) emphasize the importance of understanding these distinctions for effective policymaking, as optimism applies to all situations, overestimation to specific skill situations, and over-placement to specific market situations.

14. Entrepreneurial Self-efficacy, Risk Attitudes, and Optimism Researchers have studied the correlation between optimism and entrepreneurial activity using various predictive responses. Shane (2009) found that entrepreneurs are generally positive in their performance estimates, believing they will have higher sales. Bengtsson and Ekeblom (2014) found that entrepreneurs have higher optimism about economic conditions but less forecasting error. The general trend suggests that optimistic individuals are more likely to enter entrepreneurship but make riskier decisions and incur greater losses.

15. Research has shown that overestimation of life expectancy and optimism can lead to entrepreneurs making high-risk financial decisions. Those who overestimate their lifespan are more likely to be entrepreneurs, and the most optimistic are more likely to use short-term debt financing. Despite this, optimistic entrepreneurs earn less than pessimistic entrepreneurs. Inventor-entrepreneurs tend to both overestimate their scores and be more optimistic, which can increase expenditures of time and money even when prospects are limited. Entrepreneurs may enter competitive markets with a small chance of venture success due to overestimation of their abilities or enjoyment of competitive environments. Studies have shown that optimistic entrepreneurs may earn less than pessimistic entrepreneurs.

16. General Summary of the Research Findings The study found mixed results on entrepreneurial traits, with some studies showing more openness to experience, conscientiousness, and extraversion, while others found less conscientiousness, agreeableness, and extraversion. Entrepreneurs have higher self-efficacy in innovation and risk-taking, and higher ESE correlates with their likelihood of success. High need for achievement predicts entry into entrepreneurship, and risk tolerance varies across cultures. However, higher risk tolerance positively affects entry into entrepreneurship, and risk attitudes have no relationship with entrepreneurial survival. Entrepreneurs with higher intentions and opportunity identification tend to make risky decisions, earn less, and are optimistic but potentially detrimental to the business.