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Risk Tolerance and Entrepreneurship

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  • Hvide, Hans K.

    () (University of Bergen)

  • Panos, Georgios A.

    () (University of Glasgow)

Abstract

A tradition from Knight (1921) argues that more risk tolerant individuals are more likely to become entrepreneurs, but perform worse. We test these predictions with two risk tolerance proxies: stock market participation and personal leverage. Using investment data for 400,000 individuals, we find that common stock investors are around 50 percent more likely to subsequently start up a firm. Firms started up by stock market investors have about 25 percent lower sales and 15 percent lower return on assets. The results are similar using personal leverage as risk tolerance proxy. We consider alternative explanations including unobserved wealth and behavioral effects.

Suggested Citation

  • Hvide, Hans K. & Panos, Georgios A., 2013. "Risk Tolerance and Entrepreneurship," IZA Discussion Papers 7206, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp7206
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    Cited by:

    1. Johan Hombert & Antoinette Schoar & David Sraer & David Thesmar, 2016. "Does Unemployment Insurance Change the Selection into Entrepreneurship?," NBER Chapters,in: Measuring Entrepreneurial Businesses: Current Knowledge and Challenges, pages 351-369 National Bureau of Economic Research, Inc.
    2. Dreber, Anna & Rand, David & Wernerfelt, Nils & Worrell, Peter & Zeckhauser, Richard, 2013. "The Decisions of Entrepreneurs and Their Agents: Revealed Levels of Risk Aversion and Betrayal Aversion," Working Paper Series rwp13-016, Harvard University, John F. Kennedy School of Government.
    3. Bjorvatn, Kjetil & Cappelen, Alexander W. & Sekei, Linda Helgesson & Sørensen, Erik Ø. & Tungodden, Bertil, 2015. "Teaching through television: Experimental evidence on entrepreneurship education in Tanzania," Discussion Paper Series in Economics 3/2015, Norwegian School of Economics, Department of Economics.
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    5. Kajenthiran. K & Achchuthan. S & Ajanthan. A, 2017. "A Quest for Seeking Microcredit among Youth: Evidence from an Emerging Nation in South Asian Region," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 7(2), pages 1-8.
    6. van Praag, Mirjam C. & Raknerud, Arvid, 2017. "The Returns to Entrepreneurship: Evidence from Matched Person-Firm Data," IZA Discussion Papers 11018, Institute for the Study of Labor (IZA).
    7. Vera Rocha & Mirjam van Praag & Anabela Carneiro, 2015. "Deviating from the benchmarks: Human capital inputs and the survival of new startups," CEF.UP Working Papers 1502, Universidade do Porto, Faculdade de Economia do Porto.
    8. Holm, Håkan J. & Nee, Victor & Opper, Sonja, 2016. "Strategic Decisions: Behavioral Differences Between CEOs and Others," Working Papers 2016:35, Lund University, Department of Economics.
    9. Dawson, Christopher & de Meza, David Emmanuel & Henley, Andrew & Arabsheibani, Reza, 2015. "The Power of (Non) Positive Thinking: Self-Employed Pessimists Earn More than Optimists," IZA Discussion Papers 9242, Institute for the Study of Labor (IZA).
    10. Laura Rosendahl Huber & Randolph Sloof & Mirjam van Praag, 2012. "The Effect of Early Entrepreneurship Education: Evidence from a Randomized Field Experiment," Tinbergen Institute Discussion Papers 12-041/3, Tinbergen Institute.
    11. Thomas Astebro & Holger Herz & Ramana Nanda & Roberto A. Weber, 2014. "Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 49-70, Summer.
    12. Dylan Minor, 2016. "Risk Preferences and Misconduct: Evidence from Politicians," Harvard Business School Working Papers 16-073, Harvard Business School.
    13. Jörn H. Block & Andreas Landgraf, 2016. "Transition from part-time entrepreneurship to full-time entrepreneurship: the role of financial and non-financial motives," International Entrepreneurship and Management Journal, Springer, vol. 12(1), pages 259-282, March.
    14. Antonio Lecuna & Boyd Cohen & Roberto Chavez, 2017. "Characteristics of high-growth entrepreneurs in Latin America," International Entrepreneurship and Management Journal, Springer, vol. 13(1), pages 141-159, March.
    15. Huber, Laura Rosendahl & Sloof, Randolph & Van Praag, Mirjam, 2014. "The effect of early entrepreneurship education: Evidence from a field experiment," European Economic Review, Elsevier, vol. 72(C), pages 76-97.
    16. Arvid Raknerud & Mirjam van Praag, 2014. "The entrepreneurial earnings puzzle. Evidence from matched person-firm data," Discussion Papers 789, Statistics Norway, Research Department.
    17. Jaroslav Belás & Yuriy Bilan & Valér Demjan & Juraj Sipko, 2015. "Entrepreneurship in SME Segment: Case Study from the Czech Republic and Slovakia," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 17(38), pages 308-308, February.
    18. Sari Pekkala Kerr & William R. Kerr & Tina Xu, 2017. "Personality Traits of Entrepreneurs: A Review of Recent Literature," NBER Working Papers 24097, National Bureau of Economic Research, Inc.
    19. Martin Koudstaal & Randolph Sloof & Mirjam van Praag, 2015. "Are Entrepreneurs more Optimistic and Overconfident than Managers and Employees?," Tinbergen Institute Discussion Papers 15-124/VII, Tinbergen Institute.

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    Keywords

    entrepreneurial entry; entrepreneurial performance; firm entry; firm performance; firm productivity; firm survival; overconfidence; risk aversion; risk tolerance; stock market participation;

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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