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The Decisions of Entrepreneurs and Their Agents: Revealed Levels of Risk Aversion and Betrayal Aversion

  • Dreber, Anna

    (Stockholm School of Economics)

  • Rand, David

    (Harvard University and Yale University)

  • Wernerfelt, Nils


  • Worrell, Peter

    (Bigelow Company, Portsmouth, NH)

  • Zeckhauser, Richard

    (Harvard University)

This paper studies decision making by successful entrepreneurs and their agents. Since entrepreneurs decisions are often influenced by their agents' advice, understanding the behavior of both involved parties is crucial in analyzing observed decisions. To this end, a sample of successful American entrepreneurs and their agents made a high-stakes decision in a real-world context, albeit in an experimental setting offering experimental-scale payoffs. They were asked whether to accept a contract in what was essentially a trust game. A monetary gamble measured economic risk taking; and the difference between the two measured betrayal aversion. All entrepreneurs assumed the professional role as principal. All individuals playing agent were real world agents. We also have some agents play the role of the principal, and thus test whether subjects' roles affect the decisions they make. Consistent with most prior studies, our subjects proved both economically risk-averse and betrayal averse. Little difference in behavior emerged between entrepreneurs and agents in their respective professional capacities, or with agents acting as principals. These results imply that, under our realistically framed business scenario with aligned incentives, agents could be relied upon to be "faithful," to act according to their principals' proclivities. Importantly, however, they do not advise against what many expert observers believe to be principals' excess aversion to risks. That is, they fail to act as "correcting agents".

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp13-016.

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Date of creation: May 2013
Date of revision:
Handle: RePEc:ecl:harjfk:rwp13-016
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  1. Gary E. Bolton & Axel Ockenfels, 2010. "Betrayal Aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey, and the United States: Comment," American Economic Review, American Economic Association, vol. 100(1), pages 628-33, March.
  2. Chakravarty Sujoy & Harrison Glenn W & Haruvy Ernan E & Rutstrom Elisabet E, . "Are You Risk Averse Over Other People’s Money?," IIMA Working Papers WP2005-08-04, Indian Institute of Management Ahmedabad, Research and Publication Department.
  3. James Andreoni & Charles Sprenger, 2012. "Risk Preferences Are Not Time Preferences," American Economic Review, American Economic Association, vol. 102(7), pages 3357-76, December.
  4. Hvide, Hans K. & Panos, Georgios A., 2013. "Risk Tolerance and Entrepreneurship," IZA Discussion Papers 7206, Institute for the Study of Labor (IZA).
  5. Keith Coble & Jayson Lusk, 2010. "At the nexus of risk and time preferences: An experimental investigation," Journal of Risk and Uncertainty, Springer, vol. 41(1), pages 67-79, August.
  6. Herrmann, Benedikt & Zeckhauser, Richard Jay & Bohnet, Iris, 2009. "Trust and the Reference Points for Trustworthiness in Gulf and Western Countries," Scholarly Articles 4417252, Harvard Kennedy School of Government.
  7. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
  8. Lisa R. Anderson & Jennifer M. Mellor, 2008. "Are Risk Preferences Stable? Comparing an Experimental Measure with a Validated Survey-Based Measure," Working Papers 74, Department of Economics, College of William and Mary.
  9. Renate Schubert, 1999. "Financial Decision-Making: Are Women Really More Risk-Averse?," American Economic Review, American Economic Association, vol. 89(2), pages 381-385, May.
  10. Holm, Håkan J. & Opper, Sonja & Nee, Victor, 2012. "Entrepreneurs under Uncertainty: An Economic Experiment," Working Papers 2012:4, Lund University, Department of Economics.
  11. Elke U. Weber & Christopher Hsee, 1998. "Cross-Cultural Differences in Risk Perception, but Cross-Cultural Similarities in Attitudes Towards Perceived Risk," Management Science, INFORMS, vol. 44(9), pages 1205-1217, September.
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