Entrepreneurial decisions: viewing the affordable loss heuristic from an economic well-being perspective

Abstract

PurposeThis article conceptualises how the economic well-being of an entrepreneurial household affects its members' mental accounting process to establish its affordable loss for a plunge decision.Design/methodology/approachThe article used research literature to analyze the resources available for entrepreneurial endeavours against a household's ability to maintain acceptable minimum material living standards, juxtaposing income and wealth against competing consumption and investment opportunities.FindingsMentally accounting for whether household resources can meet minimum material living standards is central to entrepreneurs' ability to raise affordable loss and decide to invest in a new venture. The article proposes that entrepreneurial households establish affordable loss by availing their money exceeding that required to maintain acceptable minimum material living standards. In low-income households, the author assumes that members are not employed and can thus avail their time (versus money) towards affordable loss.Originality/valueEconomic well-being introduces mental accounts of income and wealth and a hedonic reference outcome in the material living standards of households required to meet basic needs. The article introduces the tension entrepreneurial households face between using their income and wealth towards investing in a new business and maintaining their material living standards. It introduces the idea that a loss can be “affordable” according to an entrepreneurial household's ability to remain above its acceptable minimum material living standard. This view prompts scholars to consider a household unit of analysis and avoid assuming an entrepreneur makes the plunge decision in isolation.

Exploring the affordable loss principle: a systematic literature review

“…The earliest relevant publication post-Dew et al (2009) was in 2011, the article by Chandler et al (2011) that aims to measure the logic of causation and effectuation. Among the 51 articles analyzed, a notable finding is that only five specifically address the theme of the ALP, as seen in works by He, Li and Zhang (2023), , Hunt, Song, Townsend and Stallkamp (2021), Martina (2020), andReddy (2023). This result underscores ALP's nascent yet underexplored nature within the broader effectuation framework, highlighting significant potential for future research.…”

“…As we synthesize the findings from the broader review, it is crucial to highlight the contributions of five pivotal studies that focus exclusively on ALP. The studies of , , Hunt et al (2021), Martina (2020), andReddy (2023) represent a significant concentration of research effort directly addressing the nuances of ALP. These five studies reveal a rich and multifaceted approach to exploring how entrepreneurs deal with uncertainty and resource constraints when starting new ventures or going international.…”

Are Entrepreneurs Probabilists or Possibilists? Observing Opportunity as Possibilities, Probabilistically

“…Entrepreneurial activities often involve utilising scarce resources, confronting entrepreneurs with the need to assess whether the potential benefits outweigh the costs [29]. Entrepreneurs employ strategies like the ' affordable loss ' principle to manage risks and make decisions under uncertainty [30,31]. They innovate and optimize resources to fulfil their venture's objectives, although existing theories like effectuation, bricolage, and causation explain the mechanisms of entrepreneurial behaviour without delving into the motivations behind these actions [5].…”