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

  • Mattias Brachert
  • Walter Hyll

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.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.467170.de/diw_sp0667.pdf
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Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 667.

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Length: 25 p.
Date of creation: 2014
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp667
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  1. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2011. "Individual Risk Attitudes: Measurement, Determinants, And Behavioral Consequences," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 522-550, 06.
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  8. Hartog, Joop & Ferrer-i-Carbonell, Ada & Jonker, Nicole, 2002. "Linking Measured Risk Aversion to Individual Characteristics," Kyklos, Wiley Blackwell, vol. 55(1), pages 3-26.
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  11. Samuel Bowles, 1998. "Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 75-111, March.
  12. Deniz Ucbasaran & Paul Westhead & Mike Wright, 2008. "Opportunity Identification and Pursuit: Does an Entrepreneur’s Human Capital Matter?," Small Business Economics, Springer, vol. 30(2), pages 153-173, February.
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  14. Marco Gelderen & Lidewey Sluis & Paul Jansen, 2005. "Learning Opportunities and Learning Behaviours of Small Business Starters: Relations with Goal Achievement, Skill Development and Satisfaction," Small Business Economics, Springer, vol. 25(1), pages 97-108, 08.
  15. Cramer, J. S. & Hartog, J. & Jonker, N. & Van Praag, C. M., 2002. "Low risk aversion encourages the choice for entrepreneurship: an empirical test of a truism," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 29-36, May.
  16. Janney, Jay J. & Dess, Gregory G., 2006. "The risk concept for entrepreneurs reconsidered: New challenges to the conventional wisdom," Journal of Business Venturing, Elsevier, vol. 21(3), pages 385-400, May.
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