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On the Stability of Preferences: Repercussions of Entrepreneurship on Risk Attitudes

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  • Mattias Brachert
  • Walter Hyll

Abstract

The majority of empirical studies make use of the assumption of stable preferences in searching for a relationship between risk attitude and the decision to become and stay an entrepreneur. Yet empirical evidence on this relationship is limited. In this paper, we show that entry into entrepreneurship itself plays a decisive role in shaping risk preferences. We find that becoming self-employed is indeed associated with a relative increase in risk attitudes, an increase that is quantitatively large and significant even after controlling for individual characteristics, different employment status, and duration of entrepreneurship. The findings suggest that studies assuming that risk attitudes are stable over time suffer from reverse causality; risk attitudes do not remain stable over time, and individual preferences change endogenously.

Suggested Citation

  • Mattias Brachert & Walter Hyll, 2014. "On the Stability of Preferences: Repercussions of Entrepreneurship on Risk Attitudes," SOEPpapers on Multidisciplinary Panel Data Research 667, DIW Berlin, The German Socio-Economic Panel (SOEP).
    • Handle: RePEc:diw:diwsop:diw_sp667
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    References listed on IDEAS

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    Cited by:

    1. Hetschko, Clemens & Preuss, Malte, 2015. "Income in Jeopardy: How losing employment affects the willingness to take risks," Discussion Papers 2015/32, Free University Berlin, School of Business & Economics.
    2. Maria Adelaida Lopera & Steeve Marchand, 2017. "Peer effects and risk-taking among entrepreneurs: Lab-in-the-field evidence," Working Papers PIERI 2017-21, PEP-PIERI.
    3. Jansen, Anika & Pfeifer, Harald & Raecke, Julia, "undated". "Only the brave? Risk and time preferences of decision makers and firms’ investment in worker training," Research Memorandum 004, Maastricht University, Graduate School of Business and Economics (GSBE).
    4. Matthias Brachert & Walter Hyll & Mirko Titze, 2014. "Entry into Entrepreneurship, Endogenous Adaption of Risk Attitudes and Entrepreneurial Survival," SOEPpapers on Multidisciplinary Panel Data Research 701, DIW Berlin, The German Socio-Economic Panel (SOEP).
    5. Franziska Tausch & Maria Zumbuehl, 2016. "Stability of risk attitudes and media coverage of economic news," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_02, Max Planck Institute for Research on Collective Goods.
    6. Martin Koudstaal & Randolph Sloof & Mirjam van Praag, 2016. "Risk, Uncertainty, and Entrepreneurship: Evidence from a Lab-in-the-Field Experiment," Management Science, INFORMS, vol. 62(10), pages 2897-2915, October.
    7. Maria Adelaida Lopera & Steeve Marchand, 2017. "Peer effects and risk-taking among entrepreneurs: Lab-in-the-field evidence," Working Papers PIERI 2017-21, PEP-PIERI.

    More about this item

    Keywords

    Endogenous preferences; Risk attitudes; Entrepreneurship; German Socio-Economic Panel;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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