Risk, Uncertainty, and Entrepreneurship: Evidence from a Lab-in-the-Field Experiment

Abstract

Theory predicts that entrepreneurs have distinct attitudes toward risk and uncertainty, but empirical evidence is mixed. To better understand the unique behavioral characteristics of entrepreneurs and the causes of these mixed results, we perform a large “lab-in-the-field” experiment comparing entrepreneurs to managers (a suitable comparison group) and employees (n = 2,288). The results indicate that entrepreneurs perceive themselves as less risk averse than managers and employees, in line with common wisdom. However, when using experimental incentivized measures, the differences are subtler. Entrepreneurs are only found to be unique in their lower degree of loss aversion, and not in their risk or ambiguity aversion. This combination of results might be explained by our finding that perceived risk attitude is not only correlated to risk aversion but also to loss aversion. Overall, we therefore suggest using a broader definition of risk that captures this unique feature of entrepreneurs: their willingness to risk losses. This paper was accepted by Uri Gneezy, behavioral economics.

The Origins and Extent of Entrepreneurial Action-Orientedness: An Experimental Study

“…The remainder of the analysis will focus on those participants that fall within the three occupations of our interest. The descriptive statistics of background variables such as gender, age and education show that the sample is composed similarly as the earlier samples used by Koudstaal et al (2015), who assess the representativeness of their sample as being good (as far as their data allow them to test this). In the final analyses, we will limit the sample to 1,057 observations in total (594 employees, 322 entrepreneurs and 141 managers) due to the exclusion of outliers in the sense that the stopping decision is outside the reasonable range of {3, 4, 5, 6}, see Section 4.1.…”

“…As a result, they are expected to be less likely to feel regret for bad outcomes resulting from their decisions and thus less likely to seek the benefits of blame avoidance. Similarly, it can be found that entrepreneurs are more tolerant towards losses than managers and wage employees (Koudstaal et al, 2015). Given a greater tendency to undertake explorative search (Laureiro-Martínez et al, 2013), entrepreneurs are also more likely to be driven by curiosity.…”

“…Given budget restrictions and the rather high average income levels of the population studied, we chose to pay out a substantial amount to only a few randomly selected participants (Gneezy and Rustichini, 2000;Laury, 2006;Koudstaal et al, 2015). To foster trust, the selection of prize winners and all random draws in the experiments were assigned to a civil-law notary who also monitored a legitimate course of the payouts.…”

“…One can therefore argue that entrepreneurs are less prone to inaction because they exhibit a greater tendency for explorative search and curiosity (Laureiro-Martínez et al, 2013) and are less loss averse (Koudstaal et al, 2015) than others. Consequentially, differences in actionorientedness between entrepreneurs and others should become less prominent or disappear when controlling for individual curiosity and loss aversion.…”

“…For this purpose, individual loss aversion is measured by replicating an incentive-compatible multiple price list (MPL) elicitation procedure from Koudstaal et al (2015) and individual curiosity is measured by employing the Curiosity and Exploration Inventory-II questionnaire in Kashdan et al (2009)…”