Holding on for too long? An experimental study on inertia in entrepreneurs’ and non-entrepreneurs’ disinvestment choices

Abstract

Disinvestment, in the sense of project termination and liquidation of assets including the cession of a venture, is an important realm of entrepreneurial decision-making. This study presents the results of an experimental investigation modeling the choice to disinvest as a dynamic problem of optimal stopping in which the patterns of decisions are analyzed with entrepreneurs and non-entrepreneurs. Our experimental results reject the standard net present value approach as an account of observed behavior. Instead, most individuals seem to understand the value of waiting. Their choices are weakly related to the disinvestment triggers derived from a formal optimal stopping benchmark consistent with real options reasoning. We also observe a pronounced 'psychological inertia', i.e., most individuals hold on to a losing project for even longer than real options reasoning would predict. The study provides evidence for entrepreneurs and nonentrepreneurs being quite similar in their behavior.

Entrepreneurs’ Exploratory Perseverance in Learning Settings

“…Our findings therefore help to reconcile prior research on entrepreneurs' perseverance that did not find evidence of entrepreneurs' stronger perseverance in settings outside of the entrepreneurial venture (e.g., Burmeister & Schade, 2007;Sandri et al, 2010).…”

“…Bönte et al, in press, Urbig et al, 2012), the second sample offers more heterogeneity across entrepreneurs and nonentrepreneurs and therefore more insight into the extent to which conclusions drawn from the student sample can be generalized to other populations. Our sample sizes are similar or even exceed (for Sample 2) the samples sizes reported in comparable IGT studies (e.g., d 'Acremont & Van der Linden, 2006;Harman, 2011) and in incentivized experimental studies in entrepreneurship research (e.g., Gatewood et al, 2002;Sandri et al, 2010).…”

“…Scholars have gained significant insights into antecedents (Gimeno et al, 1997;DeTienne et al, 2008;Holland & Sheperd, 2013;Markman et al, 2005) and emotional and financial implications (e.g., Baum & Locke, 2004;Markman et al, 2005;Sandri et al, 2010;Shepherd et al, 2009) of such perseverance. However, it remains an open question whether entrepreneurs are also more perseverant prior to having selected a particular opportunity.…”

Entrepreneurs Under Uncertainty: An Economic Experiment in China

“…Third, experimental studies using incentivized tasks shed further doubt on the assumed behavioral differences between entrepreneur and nonentrepreneurs. Evidence based on nonrandomly selected samples suggests that entrepreneurs do not behave differently than nonentrepreneurs when exposed to situations of standard risk (Elston et al 2006, Macko and Tyszka 2009, Sandri et al 2010, List and Mason 2011, although they may be better able to cope with uncertainty (Macko and Tyszka 2009).…”

Is experience a useful resource for business model innovation?

“…This methodology has been gaining momentum in our field in recent years (Elston, Harrison, and Rutström 2005); (Burmeister and Schade 2007); (Sandri et al 2010); (Sarasvathy 2008); (Perry, Chandler, and Markova 2012), because it allows us to "test designs, layouts, etc. without committing resources to their implementation" (Shannon 1998, p. 7).…”