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The endowment effect on entrepreneurs: A risky attachment

Author

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  • Isabela Echeverry Peñón
  • Santiago Reyes Ortega

Abstract

This paper presents evidence on the role of the endowment effect in shaping the risk-taking behavior of entrepreneurs, and how the potential of losing their firms lead them to take higher risks. This study uses an experimental design with 466 entrepreneurs in Cali, Colombia. Results show that entrepreneurs are more likely to accept riskier bets when those are related to the possession of their companies than in non-framed lotteries. The data shows that the existence of the endowment effect increases the certainty equivalent of a lottery, for the median entrepreneur, by 36.5%. This could explain why many entrepreneurs prefer to continue operating their underperforming firms, as well as why many entrepreneurs overvalue their firms during investment processes. This paper presents an alternate view on the drivers behind entrepreneurs’ risk-taking behavior and opens a door for future research on the role of biases on entrepreneurs’ decision-making processes.

Suggested Citation

  • Isabela Echeverry Peñón & Santiago Reyes Ortega, 2018. "The endowment effect on entrepreneurs: A risky attachment," Estudios de Economia, University of Chile, Department of Economics, vol. 45(2), pages 231-249, December.
    • Handle: RePEc:udc:esteco:v:45:y:2018:i:2:p:231-249
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    File URL: https://estudiosdeeconomia.uchile.cl/index.php/EDE/article/view/51349/53733
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    Cited by:

    1. Jae-Do Song & Young-Hwan Ahn, 2019. "Cognitive Bias in Emissions Trading," Sustainability, MDPI, vol. 11(5), pages 1-13, March.

    More about this item

    Keywords

    Endowment effect; cognitive biases; entrepreneurship; risk behavior; investment decisions; experimental design;
    All these keywords.

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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