Where Is The Risk? Availability, Anchoring, and Framing Effects on Entrepreneurial Risk Taking

Principal TopicAlthough research has emphasized cognition and the use of heuristics and cognitive biases by entrepreneurs, the process by which available information influences one's decision to start a business has yet to be clarified. In order to address this issue, we propose and test a model where changes in the available information concerning a new venture impact the perceived risk associated with this venture— ultimately affecting the decision to start it. In our model, two important cognitive heuristics influence risk perception and bias decision making: availability and anchoring. Moreover, we hypothesize that these heuristics will have opposite effects, depending on whether the available information is framed in terms of gains or losses. In conducting this study, we contribute to research on entrepreneurial cognition and decision-making by deepening our understanding of how the combination of judgmental heuristics and the framing of situations stimulate or inhibit entrepreneurial behavior.MethodologyParticipants were presented with four different scenarios in a quasi-experimental, repeated-measures design. All scenarios presented a situation where the respondent was invited by a friend to start a new venture. The initial probability of success given for the venture was 50%. Participants were asked to indicate the level of risk they perceived in the option of joining the friend, and whether they would do it or not. Additional information was then given for each scenario. Participants were then asked to indicate the level of risk they finally perceived in the option of joining the friend and whether they would actually join. In addition, they were asked to indicate the estimated probability of success of the venture.Results and Implications Results reveal the complex interaction between heuristics and problem framing in determining the perceived risk associated with entrepreneurial behavior. Such cognitive mechanisms may bias risk perception in ways that encourage or discourage entrepreneurial risk taking and action. While these results gives scholars a better understanding of the cognitive nuances of entrepreneurship, the awareness of such mechanisms may also assist nascent entrepreneurs in reducing the actual risks of missing an opportunity and/or doing poorly.