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Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics

Author

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  • Thomas Astebro
  • Holger Herz
  • Ramana Nanda
  • Roberto A. Weber

Abstract

There is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This has lead to attempts to provide explanations—using both standard economic theory and behavioral economics—for why certain individuals may be attracted to such an apparently unprofitable activity. Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship. Differences in risk aversion provide a plausible and intuitive interpretation of entrepreneurial activity. In addition, a growing literature has begun to highlight the potential importance of overconfidence in driving entrepreneurial outcomes. Such a mechanism may appear at face value to work like a lower level of risk aversion, but there are clear conceptual differences—in particular, overconfidence likely arises from behavioral biases and misperceptions of probability distributions. Finally, nonpecuniary taste-based factors may be important in motivating both the decisions to enter into and to persist in entrepreneurship.

Suggested Citation

  • Thomas Astebro & Holger Herz & Ramana Nanda & Roberto A. Weber, 2014. "Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 49-70, Summer.
  • Handle: RePEc:aea:jecper:v:28:y:2014:i:3:p:49-70
    Note: DOI: 10.1257/jep.28.3.49
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    References listed on IDEAS

    as
    1. Hvide, Hans K. & Panos, Georgios A., 2014. "Risk tolerance and entrepreneurship," Journal of Financial Economics, Elsevier, vol. 111(1), pages 200-223.
    2. Herz, Holger & Schunk, Daniel & Zehnder, Christian, 2014. "How do judgmental overconfidence and overoptimism shape innovative activity?," Games and Economic Behavior, Elsevier, vol. 83(C), pages 1-23.
    3. William R. Kerr & Ramana Nanda, 2010. "Banking Deregulations, Financing Constraints, and Firm Entry Size," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 582-593, 04-05.
    4. Cooper, David J. & Saral, Krista Jabs, 2013. "Entrepreneurship and team participation: An experimental study," European Economic Review, Elsevier, vol. 59(C), pages 126-140.
    5. Björn Bartling & Ernst Fehr & Holger Herz, 2014. "The Intrinsic Value of Decision Rights," Econometrica, Econometric Society, vol. 82, pages 2005-2039, November.
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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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